Recently, I’ve been pondering a question: many people have learned how to short, but they overlook a risk that can cause instant liquidation. This risk is called a short squeeze, which is the process where the market forcibly pushes out short sellers. In simple terms, a short squeeze occurs when a large number of investors are short a stock, and suddenly the price starts to surge rapidly, forcing shorts to cover at high prices, which in turn drives the price even higher, creating a vicious cycle.

First, let’s talk about how short selling works. There are basically three methods: borrowing stocks to sell, using futures contracts, or trading CFDs. No matter which method you use, as long as the stock price keeps rising, your margin will be depleted, and eventually the broker will force a liquidation. If the market has a lot of short positions, everyone gets forced to cover, which further pushes up the price. This is a short squeeze scenario.

Why does a short squeeze happen? Usually, several conditions occur simultaneously: a very high short interest ratio, a small circulating share count, strong market sentiment, plus some positive news or large capital inflows. When these factors align, the stock price can spike irrationally and rapidly.

The most classic example is GME. At the end of 2020, Wall Street institutions were bearish on this gaming company and started heavily shorting it, with short interest exceeding 140% of the total shares. But retail investors on Reddit refused to accept this, and decided to buy en masse. In just two weeks, the stock price soared from $30 to $483. Short sellers, due to margin calls, were forced to cover, reportedly losing over $5 billion. The price then quickly fell back, and the entire short squeeze process lasted less than a month.

Another example is Tesla. In its early years, Tesla was losing money continuously, and institutions were heavily shorting it. But starting in 2020, the fundamentals improved significantly, and the stock price skyrocketed—rising sixfold in half a year, and later even doing a stock split. In just two years, the stock price increased nearly 20 times, and short sellers suffered heavy losses.

If you want to short, I recommend asking yourself three questions first. First, can I afford the maximum loss on this short position? Second, do I have a clear stop-loss point if the price moves against me? Third, is this stock prone to a short squeeze? Pay special attention to the short interest ratio, trading volume changes, and price trends. When these signals point to danger, the best approach isn’t to hold on stubbornly but to cut losses early.

To face short squeeze risks, I’ve compiled two practical tips. If a stock’s short interest exceeds 40-50% of the circulating shares, even if the price is still falling, consider closing the position early. You can also look at the RSI indicator; when RSI drops below 20, it indicates oversold conditions, and the risk of a squeeze is highest. If you want to join a short squeeze to force a short covering, closely monitor the short positions. Once shorts start covering, take profits early because this kind of rally isn’t based on fundamentals, and it can quickly reverse once the squeeze ends.

How can you avoid a short squeeze? Choosing major indices or large-cap stocks tends to be safer because these assets have high liquidity, making extreme short interest less likely. In a bear market, using CFDs instead of borrowing stocks for shorting offers more flexibility, as you can adjust leverage, go long or short, and there’s no expiration date. Some traders hedge risk by simultaneously long and shorting the market; as long as individual stocks perform better or worse than the market, they can profit.

The danger of a short squeeze isn’t just that it rises quickly, but that it can pull you from manageable risk into an asymmetric loss structure. It doesn’t usually happen out of nowhere but results from accumulated short positions, poor liquidity, and intense sentiment, often ignited by a news event or a large capital inflow. Experienced traders assess the odds before entering, rather than rushing in at the sight of a squeeze. As long as you can judge whether the risk-reward ratio is reasonable, a short squeeze isn’t an unpredictable black swan but a risk that must be taken seriously during trading.