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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