Short Squeeze describes a situation in which traders who sold short close their positions due to the possibility of loss, following a sharp increase in the price of any short-sold financial asset due to a lack of market supply. Unexpectedly rising prices force short position holders to buy back assets at a higher price to close their positions. This happens when buying pressure suddenly increases. The increased demand causes prices to rise further, leading to this vicious cycle known as a Short Squeeze. Traders also call it “Crushing Short Sellers”.
An Example: The GameStop Short Squeeze
In 2021, the GameStop stock price was hovering in a significantly low price range as several large mutual funds shorted the stock. Redditors on WallStreetBets, a popular subreddit on Reddit, began buying GameStop stocks and quickly drove the stock price up. Rising prices caused huge losses for short position holders, and they had to buy stocks to close their positions with minimal losses and lower the average. As demand increased, so did the stock price. This resulted in even more losses for short position holders. The GameStop stock price skyrocketed in a matter of days, setting a historic record. The GameStop Short Squeeze had a huge impact in the financial world and was a major topic of discussion.
In financial markets, not everything can always move in line with technical indicators. We should not forget that analysis methods or strategies do not guarantee exact results.