A short squeeze occurs when there is excess demand and insufficient supply for a particular financial security.
What happens is that prices continue to rise rapidly due to excess demand. A trader holding a short position attempts to close (i.e. close) the position, which can only be accomplished by buying. We typically see continued increases as the price gets higher and higher as more traders look to buy. In this sense, all the “shorts” are squeezed.
In the forex market, short squeezes usually occur after a sharp, sharp move, and then we see a reversal.
For example, EUR/USD is in a long-term downtrend. Some traders may feel that the euro is undervalued to a certain extent, making it a good investment. As more buyers entered the market, traders holding short euro positions decided it was best to close their positions or risk losing money. This resulted in more and more traders buying the euro and all short positions being squeezed out of the market.
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