Introduction:
Strategies and tactics in financial markets are vast, as there is never a resting moment for any trader as people try their best to get the best out of their operations. A long squeeze occurs when traders long in a specific asset see a very sudden drop that compels them to liquidate in anticipation of things getting even worse. This sets up a chain effect that brings about the ultimate low of the asset price. Even to the most experienced investor, this scenario might arise without warning. Understanding how a long squeeze works helps when individuals want to avoid a possible loss in times of increasing market volatility. This paper will discuss what a long squeeze is, what conditions initiate it, and real-life examples showing its effect.
What Is a Long Squeeze?
A long squeeze occurs when a sharp decline in an asset’s price squeezes those who are long-holding positions expecting the asset price to increase — into selling their holdings in a hurry. Selling pressure typically exaggerates the downtrend into a self-reinforcing cycle where each successive sale pushes the price even lower. A long squeeze differs from the short squeeze where pressure is targeted on the traders who oppose the asset, known as shorts.
Long squeezes tend to focus on long positions for highly appreciating price assets that investors have bet large amounts of money upon. Market sentiment changes; panic is easily spread over the long holders, a fast unwinding of these positions takes place, followed by the rapid decline of prices.
Causes behind a Long Squeeze:
Some causes of long squeeze are as follows:
1. Market Sentiment Shift: A shift in sentiment can cause a squeeze. For example, negative news, changes in economic indicators, and poor earnings reports might douse confidence in an asset, creating panic selling among the long holders.
2. Over-leveraged Positions: A trader who uses a lot of leverage (or borrowing) is particularly at risk. A small decline in price can force such a trader to sell since he would not have sufficient margin to hold his positions. Such a rapid unwinding of leveraged positions accelerates the price fall.
3. Profit-taking and Stop-Loss Triggers: Sometimes, the traders set stop-loss orders that will protect them from serious loss if the asset’s price falls. Once this is triggered in huge numbers, it creates a cascade that can drive the price even lower and intensify the squeeze.
4. Manipulation in the market: At times, a long squeeze is set up by an institutional big investor or hedge fund simply to collect a substantial sum from such a situation. Selling large quantities of an asset scares and forces small traders to sell to them, thus allowing those big investors to buy the same asset later at cheaper rates.
5. Low Liquidity: When the trading volume becomes very low in markets or assets, then price movements become extreme because of the lack of liquidity. So, a long squeeze will happen very fast as so many long positions want to get out at the same time, and prices go through the floor as no buyer is willing to absorb all sell orders.
Examples of Long Squeeze in the Markets:
1. Oil Market in Early 2020: The oil market got severely squeezed during the early months of the COVID-19 pandemic. Lockdowns drastically reduced demand for oil, causing prices to plummet. Long positions held by traders in oil futures had to be sold to lower prices. This ended in a historic event when oil futures for May 2020 delivery went negative, a clear example of a long squeeze in a commodity market.
2. Crypto Market: Cryptos are highly volatile, thereby increasing the chances of experiencing a long squeeze. Case in point: during the 2021 crypto correction period, big sell-offs were realized among assets like Bitcoin and Ethereum. Several traders that held long positions on a leveraged exchange had to sell, thereby creating a long squeeze that amplified further declines across the market.
3. Squeeze in Stocks: One can see a long squeeze in the stocks, predominantly in the tech sector. Most of the tech is quoted with a high hope of growth. In case of failing earnings from a particular stock, it may lead to selling. This was indeed the scenario for several high-profile stocks in the major tech categories whose investors got so overly leveraged they had little choice but to sell which led to extremely sharp drops in price in a relatively short period.
Conclusion:
Long squeezes can really help investors holding various forms of investment and doing business in a trading company since such situations might end up with huge losses. But once it is going on, knowledge about sentiment and economic news is all that an investor has in preparation against such triggers of losing opportunities. By observing all signs of long squeezes earlier, traders could adjust positions so as to have zero percent loss or gain due to an increase in share value, thus offering a great source of profit during critical long squeeze situations. Information on these changes, coupled with disciplined investing, will always better prepare traders to fight market volatilities as well as avoid the trap of a possible long squeeze.