You may wonder what has just happened over the past days, as we saw Ethereum prices shoot up through all resistances without much effort. Well, you have just assisted a short squeeze... I did not see anyone talk about this on TradingView lately, so if you don't know what this means, let me briefly explain it.
I. What is a short squeeze?
A short squeeze happens when the price of an asset sharply rises because a lot of short sellers are being forced to close their positions.
In our case, short sellers have been betting that the price of an asset will decline, opening positions mostly in the range of 1750-1300$. However, over the past days the price started to rise instead and their short positions started to amass an unrealized loss that became bigger as the price went up and forced them to close their positions. This can occur via stop-loss triggers, liquidations (for margin and futures contracts). It can also happen simply because traders manually close their positions to avoid even greater losses.
II. Why does this make the price go up so fast?
So, how do short sellers close their positions? They buy. This is why a short squeeze results in a sharp price spike. As short sellers close their positions, a cascading effect of buy orders adds more fuel to the fire. As such, a short squeeze is typically accompanied by an equivalent spike in trading volume, as you have seen over the past days.
The more liquidity there is to trap, the greater the increase in volatility may be thanks to a short squeeze. In this sense, a short squeeze is a temporary increase in demand while a decrease in supply. Algos and trading bots love liquidity, so the a lot of buy volume came into play in order to squeeze the shorts.
III. What will happen next?
I don't expect Ethereum to make another big run because I think that we are towards the end of the squeeze. It may try to go for a last run to the 1750$ area in order to grab the remaining liquidity, but I see that as quite unlikely because the range of 1700$ is known to be a very strong resistance level and it already went too far enough by touching 1630$. I will be looking to short the 1600-1700$ range when it gets there.
I. What is a short squeeze?
A short squeeze happens when the price of an asset sharply rises because a lot of short sellers are being forced to close their positions.
In our case, short sellers have been betting that the price of an asset will decline, opening positions mostly in the range of 1750-1300$. However, over the past days the price started to rise instead and their short positions started to amass an unrealized loss that became bigger as the price went up and forced them to close their positions. This can occur via stop-loss triggers, liquidations (for margin and futures contracts). It can also happen simply because traders manually close their positions to avoid even greater losses.
II. Why does this make the price go up so fast?
So, how do short sellers close their positions? They buy. This is why a short squeeze results in a sharp price spike. As short sellers close their positions, a cascading effect of buy orders adds more fuel to the fire. As such, a short squeeze is typically accompanied by an equivalent spike in trading volume, as you have seen over the past days.
The more liquidity there is to trap, the greater the increase in volatility may be thanks to a short squeeze. In this sense, a short squeeze is a temporary increase in demand while a decrease in supply. Algos and trading bots love liquidity, so the a lot of buy volume came into play in order to squeeze the shorts.
III. What will happen next?
I don't expect Ethereum to make another big run because I think that we are towards the end of the squeeze. It may try to go for a last run to the 1750$ area in order to grab the remaining liquidity, but I see that as quite unlikely because the range of 1700$ is known to be a very strong resistance level and it already went too far enough by touching 1630$. I will be looking to short the 1600-1700$ range when it gets there.