Long Squeeze – Explained

Buying stocks at lower price and selling it at higher price is known as going long. Price of stocks cannot be going up everyday, when it hits a particular price it reverses its direction and there are many reasons for it. The first reason could be profit booking by those who went long. Secondly the stock may be overpriced and investors who think the stock is priced more than what it deserves end up exiting their long positions in fear of trend reversal. Thirdly investors who look at stock’s fundamentals may not buy when the stock is overpriced. The actual reason why a stock may go up beyond a certain threshold is due to fear of missing out on the opportunity to go long by long investors, and when too many people think that way the price gets to the top. At a certain level the stock reverses. To make it simple let’s assume the stock price is in 25th floor. At this floor the intelligent investors exit their long position. The price now hits 24th floor due to selling. People who bought the stocks at 25th floor would have lost some money as the stock hit 24th floor, as they don’t want to lose more they end up covering their long position (they sell the stock), now the stock would hit 23rd floor. The drop from 25th floor to 24th floor makes the first red candle. The drop from 24th to 23rd floor makes the second red candle. Short sellers usually wait till the second candle to confirm the trend reversal. Now the short sellers end up joining the game, this takes the price to the 22nd floor. Long investors who already lost quite some money due to drop of three floors enter the game to sell the stocks they hold. Now everyone is on the selling side, short sellers to make profit and long investors to prevent further loss. This makes the price of the stock to go further down. At a certain point when the price of the stock hits its actual worth say 19th floor then the selling spree may stop as value investors end up buying at the dip. And short sellers also end up buying in order to complete the trade.

Long squeeze is less common when compared to short squeeze. It’s not mandatory like shorting where the seller needs to buy back the stocks to complete the trade. Long investors can exit whenever they want. The drop of 6 floors may not be a concern to someone who plans to sell the stock at 95th floor after ten years.

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Disclaimer : Trading stocks is subjected to market risks. Please read all the terms and conditions before investing. The motive of this lesson was to teach little things about stocks for those who do not understand much about stocks. Candidcanblog.com will not hold any responsibility for any losses incurred to the readers of this post.

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Short Squeeze – Explained

Short sellers sell the stock first and later buy at a lower price in order to make profit. But sometimes the stock price goes up due to various reasons. In this case short sellers buy back the stock to prevent excess loss. Firstly there are long buyers who buy the stock due to various reasons, some of the reasons can be good earnings report from the company, positive outlook etc. Due to long buyers the price of the stock goes up and now there are short sellers too who end up buying the stock in order to limit their loss. This results in stock prices shooting up real quick and to greater prices. The price shooting up attracts new buyers who too want to make a profit by going long and as demand is greater the price of the stock shoots further high. This is known as short squeeze.

Let me explain this with an example. Imagine the price of a stock is ₹100 and you expect it to hit ₹95. So you sell the stock at ₹100. Now imagine there are more people who think like you and they too sold the stock assuming the price of the stock would fall. But due to some reason the stock price goes up, let’s assume it hits ₹102. Now all those short sellers who sold the stock at ₹100 are in a loss of ₹2. In order to prevent excess loss, the short sellers flock to buy the stock. This creates excess demand. Imagine there are 100 long buyers, now there are those 100 short sellers too who become buyers. All together there are 200 buyers. This results in price shooting up. Also some short sellers who do adjustment trades end up buying excess in order to overcome their losses. Basically they buy more and go long to cover losses. ₹100 to ₹102 is a ₹2 loss per share for a short seller. If the same dude goes long by buying at ₹102 and if the stock hits ₹105 he’ll make a ₹3 profit. As he made a loss of ₹2 earlier and now a profit of ₹3, the net profit is ₹1. People with sufficient capital can play the market in both directions, sometimes simultaneously, and if they are good at mathematics and finance they’ll find a way to make money in any type of situation and as long as the stock doesn’t go stagnant. We drifted away from the title of the post but yeah more demand means more buying and stock price shooting up.

Disclaimer : Trading stocks is subjected to market risks. Please read all the terms and conditions before investing. The motive of this lesson was to teach little things about stocks for those who do not understand much about stocks. Candidcanblog.com will not hold any responsibility for any losses incurred to the readers of this post.

© Candidcanblog.com