Short Squeeze occur when a lack of supply tends to force prices upward. In particular, when prices of a stock or commodity futures contracts start to move up sharply and many traders with short positions are forced to buy stocks or commodities in order to cover their positions and prevent or limit losses. This sudden surge of buying leads to even higher prices, further aggravating the losses of short sellers who have not covered their positions.

Short Squeeze may happen in an automated manner if the short sellers had previously placed stop-loss orders with their brokers to prepare for this eventuality.

Short squeezes are more likely to occur in stocks with small market capitalization and small floats.

Uptrending stocks will occasionally be met with a heavy dose of selling, seemingly out of nowhere. This is the same kind of behavior that leads to short squeezes, and is characterized by a large group of traders reacting to a shift in a stock’s direction.

Short selling is not a poor trading method, so there’s nothing to be afraid of. As long as you keep your stop loss in place and remain disciplined, you can avoid getting caught in a short squeeze.