Home Beginners Forex Education Forex Basic Strategies How to Trade with Short Squeezes and Short Sellers?

How to Trade with Short Squeezes and Short Sellers?

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It is always wise to be aware of the market in general. You must be aware of new trends and adapt to changes in the market. Short Squeezes are undoubtedly one of the best opportunities to look for profitable ideas in 2020. Short sellers are like the new promoters of penny stocks, who sought to inflate the stock by deceiving people. Actually, they’re even better. The former promoters of penny stocks, with their advertisements, emails, and social media posts, were not as good at raising the price of shares as are these short sellers.

Why are these short sellers so good at raising prices? Short sellers are the new promoters. They are great for raising stock prices because they love stocks that are heavily sold and start to rise after positive news for the company. They think the action should fall again.

The difference is that they have not studied. They are not learning the nuances of trading and short selling. When I sell an action, I only do it in cases where we are facing real “bombs”, about to explode, when they have risen artificially. I would never cut short an action that was going up for news on the day of its publication. That’s all these newbie short sellers do: they sell any stock that’s going up a lot. They are basing their theories on the basics of an action. They think that the company should not have such a value, so it will have to go down. That’s why they take advantage of these explosive movements in the hope that the action will fall quickly.

This is not a good short selling strategy. But I hope the short selling trend will continue. It’s great for traders looking to buy stocks. So, how can short sellers get to raise the price? When a stock goes up, all short sellers have to buy their shares to cover their position. The influx of buyers makes the price rise. Then, all short sellers just chase each other out as they increase the price. Or worse, they average. That makes the price rise even more when stocks continue to rise. Dumb short sellers don’t realize they’re the ones who keep the price going up! Let’s look at some recent examples…

Examples of Short Squeezes

Now I will show only 2 recent examples of short squeezes. The first was on January 9. The second was after a positive news release about the company. Not all short squeezes happen the first day an action goes off. Short sellers also go into stocks that are consolidating. Your thought is that the stock price will fall. But then, when stocks continue their upward trend, they begin to be driven from their positions.

Let’s see TRIL first:

Trillium Therapeutics Inc. (NASDAQ: TRIL)

TRIL was in trend for a few weeks before short squeeze. It had a breakup of several days on January 2nd but then consolidated for four days, surpassing around $1.50 on two of those days. All the short sellers thought that was the best price the stock would have. Then, on January 9, the action opened with a gap of up to $1.60. That showed that the shorts were wrong.

The short squeeze continued throughout the day, with the price rising to a maximum of $3.43. The next day, there was a slight setback in the morning. Then it shot up again, further overwhelming the short sellers who thought it was the final climb. No promoter can move stock prices this way. In two days, stocks went from $1.60 to $3.90.

Counterpath Corporation (NASDAQ: CPAH)

We have another magnificent example of a short squeeze. CPAH started shooting up after the hours of January 9. The company released the news that he’s working with Honeywell. The unified communications solution is configured to increase the productivity of mobile workers.

In the specialized press, a Honeywell executive was mentioned. When you quote a large company in a press release, it’s usually good for small business shares. It legitimizes small businesses in such agreements. In the pre-marketing operations of January 10, stocks were down all morning. Short sellers assumed that the bearish trend would continue.

At first, they were right: stocks fell slightly. But then it started to rise with a high volume. Anyone short would quickly see their account in the red. They would have to buy shares to cover their position.

But then the action consolidated for approximately two hours between $2.10 and $2.50. The short sellers were probably thinking “Ok, this is definitely the maximum price at which the stock will go up”. It then broke below the intraday support of $2.10. The shorts took that as a sign that they were right and probably increased their positions. In their minds, this was the end.

The stock dropped to $1.75 where it found support and fell laterally mid-morning. But then it went up again and broke the previous day’s peak. Those big candles on the chart represent all the short sellers who bought more shares to cover their position.

Once stocks were consolidated until midday, short sellers re-accumulated. The stock shot up again, taking all short sellers to buy to cover themselves before closing. Some stubborn ones probably stayed up all night waiting for a slot the next day. Instead, the action ran out and had two big highs in the morning.

You can see how these might be a little more difficult to trade. You have to think the opposite way to what short sellers do. Where are your risk levels? Where will you buy to cover? Once you understand this, you can take advantage of the long side.

History Does Not Repeat…

Remember the old runners. I say things like this because the past usually repeats itself. Actions have their own personality. Traders remember the stocks they trade and the stocks they fail. But trading is not an exact science. Can short selling be a good strategy?

Lately, there are many novice short sellers who give the strategy a bad reputation. So, can it be a good strategy? The short answer is yes. But, again, trading is not an exact science. It’s not as simple as opening a short or bassist position in any stock that’s rising. We must bear in mind that negotiation is always risky, and we must all know that we’ll never risk an amount we can’t afford. You should always consider your risk/reward. He needs a plan for his in and out and where he’ll cut the losses if the operation goes against him.

Short selling can be a profitable strategy. But you need to know perfectly what you’re doing. Some of my most successful students are short sellers. But they only negotiate specific patterns and use rules for each operation. You will want to focus on patterns with better options.

The best opportunities to sell short are when stocks are over-extended when a stock increases several days without a red day. Then, one day it opens up with a gap down. That’s the first time that long traders have a reason to worry. It signals a change in trend. Usually, there is a morning panic as the lengths take profits, and the shorts increase. That’s when it comes to the back of the play and there are better odds of a short.

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