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Market Squeezes: A Guide to Short and Long Squeezes and How to Trade Them
A market squeeze refers to a situation in financial markets where rapid price movements compel traders to exit their positions, intensifying the directional shift. The term most commonly applies to a short squeeze, though a long squeeze is also relevant in certain contexts. I will focus primarily on the short squeeze, given its prominence, while briefly addressing the long squeeze, before outlining actionable trading approaches.
A short squeeze occurs when an asset’s price rises sharply, contrary to the expectations of traders who have taken short positions — borrowing and selling the asset with the intent to repurchase it at a lower price. When the price increases instead, these short sellers incur losses and may be compelled to buy back the asset to cover their positions, particularly if margin calls are issued. This surge in buying activity drives the price higher still, creating a self-reinforcing cycle.
A notable example is GameStop in 2021, where the stock surged from $17 to $483 in a month, propelled by retail investors targeting heavily shorted positions. Conversely, a long squeeze emerges in an overheated market when prices drop abruptly, forcing those holding long positions — anticipating gains — to sell. This selling pressure accelerates the decline, often triggered by stop-loss…
