For the Ultimate Short Squeeze you need the market to be both Ripe* and Juicy*. Ripe: An extended time period of Price Consolidation/Low Volatility. Traders are hungry for Volatility and many of them will quickly react to the Volatility when it finally arrives. Juicy: The Long:Short Ratio is heavily weighted on the Short side, there are far more Shorts in the market than there are Longs. In this example below we have the perfect example of a Short Squeeze in Bitcoin. I’ll explain exactly what happened below these charts.
On October 15th 2018 the level of Shorts in the market had hit an area of Resistance, when shorts were this high historically the market had changed direction. Knowing this we could search for the other key ingredient in a perfect Short Squeeze, a period of low Volatility, sideways Price Action. That’s exactly what we had October 11th – 14th. Volatility is like a spring, when it’s compressed tightly it will release it’s energy violently. Low Volatility leads to High Volatility and vice versa, it’s mean reverting.
Now lets get down to the mechanics of what happened. Market Makers (MM) took advantage of the situation using the techniques described in my article: Institutional Order Flow. When price broke out of it’s Consolidation Box on Bitfinex ($6,220 – $6,399) either naturally or by MM intervention we saw several things happen all at once:
- Forced Selling / Margin Call Cascade: The Liquidation Bots of the Exchange had to execute thousands of Market Buy Orders all at once to ensure that Traders who were Short didn’t end up with negative balances, to make sure that Traders didn’t end up owing the Exchange any money.
- MM Intervention: Institutional Order Flow.
- Panic Buying / FOMO – Fear of Missing Out that came from human traders executing thousands of Market Buy Orders who watched the price explode, who simply chased the market or rushed to cover their Short positions.
- Hundreds or more of Automated Trading Bots that are following various strategies such as simply following Momentum or Price Breakouts executed thousands of Market Buy Orders all at once.
- Human traders manually executed Market Buy Orders trades to hedge whatever position or strategy
- Massively increased Liquidity in the Order Book. Humans & Bot traders also inputted thousands of new Limit Buy & Limit Sell orders. As can be seen in the Crypto chat rooms such as the Troll box of an Exchange, the phrase of something like “Oh look, it’s the whales putting up or flashing the buy walls”, those Buy Walls are referring to increased Liquidity in the Order Book via stacks of new Limit Buy Orders. This fresh Liquidity in the Order Book helps to extend the length and size of a Short Squeeze.