Short selling is one of the techniques most used by merchants to take advantage of different assets, including Bitcoin.
With them, it is possible to take advantage of bearish movements, manage downside irrigation or hedge from another position.
Although they can be used for excellent strategies, they usually carry a potential risk. Firstly, because there is no upper limit on a price; and 2nd, of which it is our responsibility to speak today, the short grips.
What are short sales squeezes?
They occur when many short sellers get stuck, and try to get out as quickly as possible seeking to reduce losses.
When a short sale is made, made through contracts, the operator assumes the responsibility of returning the asset at the same price, and tries to buy lower in order to make a profit.
But when the opposite happens, you must assume the difference between the entry and exit price as a loss, and fulfill the contract with the counterparty.
Despite the fact that sellers are clearly downward pressure, strong upward movements make them move quickly to the other side, trying to buy as soon as possible, in order to pay the smallest possible price difference.
As short traders close their positions, a cascading effect is generated with purchase orders that add fuel to the fire.
As a consequence of this situation, explosive bullish movements occur.
Are there long grips?
The same is true in the opposite case, although it is usually less likely to happen.
A long squeeze happens when the bulls get caught up in strong sales, and try to get out at the closest price. They increase bearish pressure, injecting supply into the market.
Just as short selling can increase risk, markets that don’t have the ability to use it can be affected by large price bubbles.
This is because as long as there are no people interested in trading short, there will be no higher pressure, and the price may continue to rise for a long time.
Traders use the long / short ratio to monitor market sentiment, and at the same time it is possible to forecast the strength of a squeeze.
When there are more short positions than long ones, there is more liquidity to increase the cascade effect of a short squeeze.
Do grips occur frequently?
This type of movement is really common in the financial markets, generally when the investor’s feeling is negative towards the asset.
Short sellers perceive that the price is high, which is why they are accumulating large amounts of down positions.
Although it can be caused by unexpected positive news, forcing short traders to buy, it is generally a technical pattern.
In the Bitcoin derivatives market, leverage is often heavily used, increasing the risk of squeezes, product of traders who use great leverage, and need to limit losses even when the price fluctuation is very small.
Bitcoin Short Squeeze Example
In the beginning of 2019, when the price was in a strong consolidation after the big crypto fall in winter, a good example occurred.
At the time, it is highly likely that the sentiment was quite negative towards Bitcoin. For this reason, short sales were at the time the majority.
Nonetheless, for what was a breakout consolidation for some prior to the continuation of the previous downtrend, for others it was an excellent time to buy if they took into account the large historical uptrend.
Despite the fact that broken levels are usually tested quickly, after the start of the leak at the top of this consolidation, the price flew so fast, that it was not until last March when said level was put to the test.
With this behavior, it is very likely that what happened was a short squeeze. Bassists trying to buy as soon as possible, considerably reducing the supply of available currencies.
What do you think of the influence of squeezes, and how can they turn Bitcoin’s short sales into bullish pressure? Did you know about this possibility? Leave us your comment below! We will be happy to read and respond.
The information used in this article was taken from Academy Binance.
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