As a short seller, he wants to see the stock prices going lower. He wants to make money trading stocks short. He shorted at market open near the pre-market low since the pre-market was weak. The swing trader is a bit more relaxed, and instead of watching intraday trading patterns, he just watches stock performance since open. They consider the short-interest ratio and focus on stocks with a high number of short sellers and with a stock price being below the previous market close. Swing traders often open their market position based on the data and short interest ratio of a particular stock. They did not realize yet that the market formed a higher high, and now it is forming a higher low, which leads to even higher prices, and the short squeeze hits them even harder. Those who are still short are so happy and add more shares to their shorted stock position. After the previous high was taken out, a new slight downside move starts. What they did not realize yet is that the short squeeze occurs right now. Instead of trading alongside the rules, 50% of day traders are still short. 50% of all day traders who sold short the share cut their losses, but the other 50% still believe in the selloff. The first stage of the short squeeze just began. The day traders now have to cover their positions. Instead of running to the next lower low, the stock market and his shares turn around sharply, and the high of the newest lower high gets broken. But then, out of nowhere, the market bounces after the lower high. The day trader gets confident that it is a good idea to increase the number of shares short since he also noticed an excellent market catalyst supporting his opinion. The day trader is short, the pre-market low got broken, and the first lower high is formed. The share price fell below its pre-market lows, and he decided to short stock at a price per share of $100. He may notice that the average daily trading volume was higher than usual, and short selling was just a great idea when the market opened. If a day trader borrows shares to short a market, he intends to see the stock price going lower. They all borrowed shares to open a short position. So many people are convinced that the stock will head lower that most people are short. Investors shorted the stock since it doubled its prices within a few days, we broke below the previous day low, we opened with a gap down, or just because someone had a gut feeling that the stock prices will fall. There are huge short positions on a particular stock. In addition, the best brokers for short selling have a high number of hard to borrow stocks available, which include penny stocks and low float stocks. The list of easy to borrow shortable shares includes a few thousand stocks when talking about NYSE and Nasdaq listed stocks. Most brokers allow shorting shares these days.
The starting point for all short squeezes is when many sellers identified a potential short and took a short position by selling shares they do not have. Phases Of a Short SqueezeĪ short squeeze happens when the price per share moves strongly against the predicted price per share. Previous highs get taken out after short sellers heavily shorted shares.
But what happens if the market pushes just a bit lower and then the price per share rapidly rises? If that happens, a short squeeze is on its way. If stock prices go to the downside, then they win. They may come up with their opinion due to technical analysis, pattern recognition, high-frequency trading tactics, or order book valuation analysis.Įverything confirmed the short sellers bias, and they are all in. Think about it like that short sellers placed their bets on falling prices per share on a specific stock. A short squeeze happens when short sellers get into panic mode.