Short squeeze in the market: when bears get trapped

A short squeeze is a phenomenon where the price of an asset sharply rises, forcing traders to close losing short positions, creating a wave of buying. The result has an explosive impact on quotes, turning an ordinary market movement into a parabolic surge.

How the short squeeze scenario develops

The chain of events begins with a large accumulation of short positions. When many traders believe the price will fall, they borrow assets from brokers and sell them, expecting to buy back cheaper. However, the market does not always follow predictions.

An unexpected price increase acts as a catalyst. This could be positive news, a large purchase by an institutional investor, or simple market manipulation. Traders with shorts start to incur losses.

When losses reach a critical level, margin positions are forcibly closed. Brokers liquidate shorts by automatically buying assets at the current price. Each liquidation adds demand, pushing the price further up. A cascading effect forms: the more positions are closed, the higher the quote rises.

Historical market examples

The most famous case occurred with GameStop in 2021. Retail investors organized to buy up shares of the company, which was overloaded with shorts. The GME price rose from $20 to $483 within a few days, forcing skeptics to close positions with colossal losses.

The cryptocurrency market often experiences similar waves. Bitcoin and altcoins, especially during high volatility, become platforms for short squeezes. Futures markets, with their high volatility, are ideal for developing this scenario.

How to recognize signs of an impending squeeze

A high percentage of short positions is the first signal. When most traders hold shorts, any unexpected upward movement can trigger a chain of liquidations.

Spikes in volume during upward movements indicate active position closures. If the price increase is accompanied by abnormally high volumes, it often means forced liquidations, which amplify the dynamics.

Monitoring liquidation levels helps predict the intensity of the squeeze. When many stop-losses are clustered at one level, breaking through it can cause a avalanche of liquidations.

Current quotes of main assets

Bitcoin (BTC) is trading at $91.36K with a daily increase of +1.41%.

Ethereum (ETH) shows a price of $3.14K, gaining +1.00% over 24 hours.

Binance Coin (BNB) is at $897.90 with a growth of +2.55%.

Understanding the mechanics of a short squeeze helps traders avoid traps and recognize potential entry points. However, it is important to remember that the market remains unpredictable, and risk management remains a priority when working with volatile assets.