Crowded Short

Suppose there are a large number of people in a crowded theatre when someone yells “Fire!” A stampede ensues as everyone wants to get out as quickly as possible. Many are injured.

A similar event takes place when a large number of investors try to sell at the same time. In stocks, bonds, commodities, and foreign currencies, here participants are trading on the short side, usually at the end of a bear market or recession. Trading the short side means you have opened your trade using a sell order at a particular price since you expect prices to fall, and will use a buy order to close your position.

When everyone wants to sell at the same time (perhaps because some great news, such as a cure for cancer, was reported by a company), it can result in a “short squeeze.” This means that, in their rush to the exit, investors will sell at any price, often at big losses.