A “short-squeeze” is a bullish scenario where a high percentage of traders are short in a currency pair when the market begins to move against them (by rising).
Since most traders use stop-loss entry orders to limit losses or will close out positions if they move against them too much short squeezes can accelerate as stops are tripped to cover losses. Also since most of the traders are already short their selling power may be limited as the pair moves against them, further accelerating the bullish move. For example, lets say 80% of speculative traders are short the AUD/USD pair. If the pair starts moving upward on heavy bank buying then two things happen: a) traders are unable to sell further as they are already short, and b) as their stop-loss orders get tripped the pair will accelerate upward.
Also see long squeeze.
June 10, 2010 at 3:43 am
Thanks for this info Mark. Is there any possibility to see a “short squeeze” happening on the charts through indicators or candlestick formations?
June 10, 2010 at 3:49 am
Not that I’m aware of. A short-squeeze is almost like a mythical event – a lot of people believe in it and know that they happen but a noise trader can never be 100% sure that it is actually happening.
In general when the pair is in a strong trend and then makes a BIG leap in the opposite direction, for no apparent reason (e.g. no new news), trader’s mumble about the ‘short squeeze’ or the ‘long squeeze’ though have no idea if that is what it actually is.
June 10, 2010 at 3:53 am
Thankyou for the reply. I had a feeling that might be the case. I guess its like all the indicators are saying 1 thing yet it is doing the opposite for no apparant reason.