What Is a Short Squeeze?

Short selling allows traders to profit off an asset’s price decline. It’s a very common way to manage downside risk, hedge existing holdings, or simply express a bearish outlook on the market.

However, shorting can be an exceptionally high-risk trading strategy at times. Not only because there is no upper limit for the price of an asset, but also due to short squeezes. A short squeeze can be described as a sudden price increase. When it occurs, many short sellers get “trapped” and quickly rush to the exit to try and cover their positions.

Naturally, if you’d like to understand what a short squeeze is, you’ll need to understand what shorting is first.

If you’re not familiar with shorting and how it works, check out What is Shorting In the Financial Markets?.

In this article, we’ll discuss what a short squeeze is, how you can prepare for it, and even profit off it in a long position.

What is a short squeeze?

A short squeeze happens when the price of an asset sharply increases due to a lot of short sellers being forced out of their positions.

Short sellers are betting that the price of an asset will decline. If the price rises instead, short…