“Short squeeze” has been a term I have heard far too many times across social media platforms ever since AMC Entertainment and GameStop started the meme stock frenzy in January of this year. But what is a “short squeeze”?

In trading, you can either go long or short on a trade. Going long on a trade is what most people think of when you mention trading. It involves buying a stock at a lower price, and selling it at a higher price to make a profit. Going short, or shorting, is the opposite. You make money when a stock decreases in value. It involves borrowing and selling someone else’s shares with a view to buy them back (called “covering”) at a cheaper price. You then return the shares and pocket the difference. 

Since the crazy rallies in January, looking at the short interest (the percentage of shares that have been sold short but not yet covered) has been a hot topic. Everyone loves quoting a high short interest (anything above 30%) and believes that stock will “squeeze”, but it rarely does, and definitely not to the level that AMC and GME did. “Squeezing” is the idea that when a stock starts rising a lot in price, the traders shorting the stock are losing money so will close out the position. But covering a short position involves buying, so there is more demand to buy the stock, and the prices go even higher. This leads to even more short sellers losing money and covering their position and more buying etc.

A high short percentage can help if a stock is breaking out, so it is always good to consider when entering a stock. But also a high percentage can cause more selling pressure. If everyone is buying a stock, the price goes up. Same applies for shorts the other way. After all, short sellers are looking to make money too. Too much selling pressure can make investors who are long cut a position and cause more downwards action.

Finally, shorts will target resistance areas for stocks and cover at support areas. So use caution when entering a trade at resistance. Better yet, avoid resistance if the short percentage is high. Stick to buying support areas and breakouts.

5 thoughts on “Short Squeeze – What Is It?”
  1. […] Stocks with high Short Interest have been under the spotlight this year, ever since AMC Entertainment and GameStop started the meme stock frenzy. Short interest is the total number of shares of a particular stock that have been sold short by investors but have not yet been covered or closed out. See our explanation of “short squeeze”. […]

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