Recently, many beginners have been discussing short selling, but few have considered a deadly risk: a short squeeze. This thing may look like just a rise in the stock price, but in reality it can turn your controllable losses into an endless black hole.

The logic of a short squeeze is actually very simple—when short positions pile up to a certain level, as soon as the stock price starts to rebound, these shorts are forced to close, creating a rush of buy orders that further pushes the stock price higher. The result is a vicious cycle: the higher the price goes, the more shorts get trapped, and the greater the pressure to close positions. In plain terms, a short squeeze isn’t just a simple price increase—it’s the process of shorts being squeezed out of the market.

Why does a short squeeze happen? Usually, several conditions must occur at the same time: the proportion of short positions is unusually high, the circulating share float is not large, market sentiment is strong, and then, on top of that, a positive catalyst or the momentum of major fund inflows helps push things along. Once these conditions line up, the stock price may surge within a short period.

Just look at the GME incident. In late 2020, Wall Street institutions took a bearish view of this gaming company and began heavy shorting—short positions even exceeded 140% of the total shares. As a result, retail investors on Reddit’s WSB forum organized and decided to unite to buy and fight back against Wall Street. In just two weeks in January 2021, the stock price skyrocketed from 30 to 483. The shorts basically had no time to react; with insufficient margin, they were forced to close positions, and it’s said the short side lost more than $5 billion.

Tesla’s case is different. TSLA was also originally a key target for institutional shorting, but in 2020 the company turned from loss to profit. The Shanghai factory began to contribute revenue, and the fundamentals suddenly improved. The stock price rose nearly 6 times in just half a year, and later also went through a stock split and another sharp rally, with a nearly 20-fold increase over two years. This short squeeze was driven by fundamentals—a natural short squeeze—so the short side suffered major losses as well.

If you want to short but don’t want to become a victim of a short squeeze, you must first change your mindset. Don’t ask “Will this stock drop?”—instead, ask: Can the maximum loss be controlled? When the price moves against you, is there a clear stop-loss point? Does this stock have the conditions for a short squeeze? When the ratio of short positions exceeds 40–50% of the circulating shares, the risk is already quite high.

My suggestion is to watch the RSI indicator. An RSI below 20 means it enters an oversold state, indicating that the market is irrational and that the probability of a price reversal is high. At this point, as a short seller, the smartest move is not to stubbornly hold on, but to cut down positions or exit quickly. Because once the short squeeze ends, the stock price will rapidly fall back to a reasonable level—by then, it will be too late to regret.

If you absolutely must short, when choosing a target, try to pick large-cap index constituents or heavyweight stocks. These assets have enormous liquidity, so it’s less likely that short positions will become excessively concentrated. For tool selection, instead of borrowing stocks to short, I prefer using CFD spread contracts, because you can adjust leverage and set your own stop-loss and take-profit levels, making the risk more controllable for short sellers.

After all, what’s most terrifying about a short squeeze isn’t just how fast it rises—it’s that, without you noticing, it can turn controllable risk into asymmetric losses. Truly mature traders don’t rush into opportunities just because they see them; they first judge whether the risk-reward is reasonable. As long as you can assess the odds before entering, a short squeeze won’t be an unavoidable black swan—it’s simply a risk you must respect during trading.