A squeeze is the market price temporarily moving against its longer term direction, by a larger amount than would usually be expected, and then continuing moving in its longer term direction. A long squeeze is therefore the market price moving temporarily downwards by an amount that would not be expected if the market was going to continue moving upwards.
Long Squeeze Example
A long squeeze typically occurs as shown in the example chart, and includes the following components:
- The market is in a significant upward trend (i.e. is moving upwards over the long term),
- the market then pauses and moves temporarily sideways,
- at the end of the sideways price movement, the market moves temporarily downwards by an amount that would not be expected if the market was going to continue moving upwards,
- the market then continues moving upwards and resumes the original upward trend.
Cause and Effect
A long squeeze can happen purposefully (e.g. institutional traders (with significant amounts of trading capital) could temporarily move the market price against its long term direction (i.e. downwards) so as to make a long trade at a favorable price), or as a result of a news release (e.g. a negative news release could cause the market price to temporarily move downwards in response to the news release before continuing upwards regardless of the news release). Whatever the reason for a long squeeze, the result is often that long trades reach their stop losses, and are squeezed out of the market (hence the name long squeeze).
In order to avoid a long trade falling victim to a long squeeze, a trader either needs to know that a long squeeze is occurring, or place their stop loss so that it would not be affected by a long squeeze if one occurs. Knowing that a long squeeze is likely to occur requires being familiar with the market being traded and a lot of experience watching financial market price movement. Placing a stop loss outside the scope of a long squeeze requires a trading technique or trading system that is designed according to the underlying principles of financial market price movement (which would take any potential long squeezes into account as a matter of course).
Professional traders usually have both options available to them (i.e. professional traders have both the experience to know when a long squeeze is likely to occur, and professional traders are trading correctly (i.e. according to the underlying principles of financial market price movement)). New traders sometimes have one option available to them (i.e. new traders do not have the experience to know when a long squeeze is likely to occur, but new traders could be trading correctly (assuming that they have learned a professional trading technique or trading system)), and new traders often no options available to them (i.e. new traders often do not have the experience to know that a long squeeze is likely to occur, and new traders are often not trading correctly). If a new trader finds that their long trades often fall victim to long squeezes, they should consider their trading technique or trading system, as they are likely to be trading incorrectly (and possibly trading according to a trading gimmick rather than a trading technique or trading system).
