6. Short Squeeze

Tips for Trading a Short Squeeze

As you can see from the examples above, short squeezes are one of the most powerful short-term market catalysts and can generate huge surges in share price. Short squeezes can happen very quickly and can move the stock more dramatically than a normal rally, causing huge losses if you are not paying attention.

What happens is new buyers are alerted when prices start to move which even further magnifies the buying and could cause a stock to go parabolic.

A good way to avoid being caught in a short squeeze is to always place hard stops on your short positions, especially if you are holding them over night.

It is also important to note than not all rushes to buy back shares that have been shorted are sparked by positive news.

Sometimes a rush happens because the prime broker (the part of a bank that is tasked with stock lending) has demanded the return of the borrowed shares.

You need to familiarize yourself with the short interest ratio (SIR), which measures the number of shares short divided by the average daily trading volume of the stock that interests you.

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