What Is a Short Squeeze? Why the Price Suddenly Skyrockets
Sometimes a price shoots up within hours with no obvious news. Often the cause is a short squeeze: short sellers closing their positions en masse. Here's how it works.
What it is
Someone who opens a short profits when the price falls, and to close the position they have to buy the asset back. If the price rises, short sellers get closed out by a stop-loss or a margin call, and they all buy at once. These purchases push the price even higher, triggering more stops: a chain reaction. That is a short squeeze ("squeezing the shorts").
When it happens
- Lots of open shorts: too many traders are betting against the asset.
- Low liquidity: not enough sellers to absorb the buying.
- Unexpected news or a large purchase that sets off the first wave.
- In crypto: many highly leveraged shorts on futures; their liquidations act as market buy orders.
A famous example is GameStop stock in January 2021: retail traders started buying a stock with a lot of short interest en masse, and the price multiplied within a few weeks.
How not to get squeezed
- Always set a stop-loss on a short: the potential loss is unlimited.
- Low leverage or none at all.
- Don't short "because it has risen too much": the rally can keep going.
How margin and shorting work is covered in the lesson margin and short selling.
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- A short squeeze is a chain of short closures that drives the price up.
- It's more common with heavy short interest and low liquidity.
- A stop-loss is mandatory on a short: the loss is unlimited.
Frequently Asked Questions
Can you tell in advance that a short squeeze is coming?
Not for sure. You can see warning signs: lots of open shorts, skewed funding rates on futures. But a squeeze may never happen.
Is there a reverse situation with longs?
Yes, it's called a long squeeze: the price falls, buyers' stops and liquidations get triggered, and that speeds up the decline.
Should I buy during a short squeeze?
It's very risky: the move is sharp and can reverse just as sharply. Never enter such trades without a stop-loss.
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