Short Squeeze
Tue, Apr 15A short squeeze occurs when there is a high demand and insufficient supply for a specific financial security. As a result of this excess demand, prices begin to rise rapidly. Traders who have short positions attempt to cover their positions (i.e., close them), which can only be achieved through buying. With an increasing number of traders looking to purchase, we typically observe a prolonged rally as prices continue to climb. In this context, all the "shorts" are squeezed.
In the forex market, a short squeeze usually takes place following a strong, sharp movement, leading to a reversal. For instance, the EUR/USD pair may experience a long-term downtrend. At some point, certain traders might believe that the euro is undervalued, making it an attractive investment. As more buyers enter the market, traders holding short positions on the euro may decide it is best to close their positions to avoid potential losses. This results in an increasing number of traders buying the euro, effectively squeezing all the short positions out of the market.
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