Long Squeeze in Trading: What It Is, How It Works and How Long Does Short Squeeze Last

What Is a Long Squeeze in Simple Words?

A long squeeze is a situation in the market when the price of an asset suddenly starts to decline, forcing many traders with long positions (betting on growth) to close their trades to avoid large losses. When many of these traders start selling the asset simultaneously, the price drops even more. The result is a chain reaction: the price decline intensifies, and traders lose money because they need to close their positions urgently.

Simply put, a long squeeze is a “trap” for those who expected growth. The sudden drop in price leads to their mass withdrawal from the market, intensifying the fall.

How to Define a Long-Squeeze?

A long-squeeze can be identified by several signs that often indicate a mass closing of long positions. Firstly, it is a sharp drop in price with no obvious news and a significant skewing of positions towards longs (long positions). If there are noticeably more participants expecting growth, the market becomes vulnerable to long-squeeze. At the same time, there is usually a sharp increase in the volume of sales and an increase in the number of liquidations of long positions when traders are forced to sell the asset due to a sharp price decline.

An additional signal is the high leverage of long positions, which makes them sensitive to small fluctuations. If the price falls, such positions are automatically liquidated, causing a chain reaction. By observing these signs, you can spot a possible long-squeeze in time.

How Does It Work?

Usually, it happens like this: traders, confident in the asset’s growth, open long positions with leverage. When the price starts to fall, traders with high leverage become vulnerable: their positions are automatically liquidated by the exchange to avoid even bigger losses.

These liquidations mean that the exchange sells the traders’ assets, driving the price down even further. The fall, in turn, leads to more liquidations as the price breaks through levels at which even more traders are forced to close their positions. This effect is amplified down the chain, causing a sharp and sometimes very deep drop in price.

*Liquidation in crypto trading is the forced closing of a position by a broker or exchange due to insufficient funds in the trader’s account to maintain an open trade, often due to a sharp change in the asset price.

Examples of Long-Squeeze in Crypto Trading

Long Squeeze Bitcoin

September 7, 2021: On the day El Salvador adopted Bitcoin as its official currency, the price dropped from around $52,900 to $42,800. The 19% bitcoin long squeeze drop led to over $3 billion in long positions liquidating.

BTC/USDT. Source: whitebit.com

Dogecoin

May 8, 2021: After Elon Musk’s appearance on the Saturday Night Live show, many investors expected the price of Dogecoin (DOGE) to rise and opened long positions. However, after the broadcast, the price of Dogecoin fell from around $0.70 to $0.37, a decline of more than 48.9%. This led to massive liquidations of long positions, intensifying the price drop.

DOGE/USDT. Source: tradingview.com

Shiba Inu

October 2021: The price rose sharply during the hype surrounding the Shiba Inu (SHIB) token. However, October saw a sharp squeeze moment when it plummeted from $0.000088 to $0.00004, triggering a long squeeze. Many traders who bought at the peak faced cascading liquidations, amplified the decline.

SHIB/USDT. Source: tradingview.com

During strong market movements, as during a long squeeze, volatility can capture all cryptocurrencies by market cap, affecting overall sentiment and liquidity

Long Squeeze vs Short Squeeze: Difference & Common

Short squeeze vs Long squeeze are opposite market phenomena, both associated with mass closing of positions, but occur under different conditions and affect prices differently. Let’s consider their main differences and interrelation.

Essence and Direction of Price Movement

A long squeeze crypto occurs when the price of an asset suddenly drops, forcing traders with long positions (bets on growth) to close them to avoid losses. This creates additional selling pressure and reinforces the price decline.

A short squeeze, on the other hand, occurs when the price of an asset suddenly rises, forcing traders with short positions (down bets) to quickly close their positions. This causes a chain reaction of buying that pushes the price even higher.

Mechanism and Impact on Liquidations

In long-squeeze, massive liquidations of long positions create an avalanche-like drop in price. The more traders use leverage, the stronger the effect, as the exchange automatically sells assets to cover losses.

In short-squeeze, the opposite is true: a sharp rise in price leads to the liquidation of short positions, requiring short traders to buy back the asset to close out their positions. This buying pressure accelerates the price rise.

Market Correlation

Longs and shorts are closely related to market sentiment and the balance of open positions. When the market is dominated by long positions, the probability of a long squeeze increases, especially at the first sign of a price decline. When short positions dominate, the probability of a short squeeze increases.

In volatile conditions, it is possible to switch between longs and shorts when a short squeeze replaces a long squeeze after the price falls because traders taking short trades at the low are vulnerable when the price rises.

How to Trade a Long Squeeze?

Trade cryptocurrency during a long squeeze means acting quickly and following a sound strategy as the market becomes extremely volatile. Here are a few approaches that will help you act more effectively:

• Don’t try to “catch the bottom”: During a long squeeze, the price drops rapidly, making it difficult to predict its lowest point. Trying to buy an asset in a falling market can lead to losses, as the price may continue to fall due to a chain reaction of liquidations. It is better to wait for price stabilization and signs of reversal.

• Use Short Positions: If you see signs of a long squeeze (skewed Long positions, a sharp decline for no apparent reason), this may be the moment to open a short position. However, be careful with position size and leverage, as the market can turn anytime.
• Consider derivatives (options): Options give you more flexibility to trade in a volatile market. For example, buying a put option can allow you to capitalize on a price decline without shortening the asset itself. This method also limits potential losses to the amount of premium paid.
• Set Stop-Loss and Take-Profit: Prices can fluctuate sharply and quickly during a long-squeeze. A Stop-Loss order will help limit losses in a sharp rebound, while a Take-Profit will allow you to lock in profits without waiting for a potential reversal.

• Track liquidations and volume: High-volume liquidations of long positions can signal that the squeeze is nearing completion. When liquidations slow down, the market may stabilize, making it safer to look for buying opportunities or close a short position.
• Be prepared for a reversal: A long squeeze often ends with a sharp rebound in price when many positions are closed and sellers are exhausted. If you are trading down, watch for volume and buying demand – this can be a signal that the decline is ending, and it’s time to take profits.

Conclusions

Investing in the cryptocurrency market without realizing long-squeeze risks means exposing your assets to significant danger. Long-squeeze can be a serious challenge for traders, especially those with high leverage. Understanding the mechanism of the squeeze and its impact on the market allows for more responsible position selection and risk management. In the increasingly volatile cryptocurrency market, where FOMO (Fear Of Missing Out) and FUD can change in a matter of days, this knowledge becomes an important tool to distinguish a successful trader from an unsuccessful one.