WPB Voice Market
The term "Short Covering" is often used in the market. It might be a bit confusing for newcomers. Therefore, we will explain it here.
What is Short Covering? How does it raise the market?
In the stock market, sometimes you may notice a stock price suddenly rising rapidly without any major good news. The main reason behind that is Short Covering! Let's see why this happens.
1. Short Selling – Basic Understanding
To understand Short Covering, one must first know about Short Selling.
Short Selling is:
A trader, expecting a stock price to fall, borrows that stock from the broker and immediately sells it in the market. Later, when the stock price drops, he buys back the same stock at a lower price and returns it to the broker. The price difference is his profit.
Example (in USD):
Trader X borrows 100 shares of "ABC" at $100 and immediately sells them in the market (Short Sell).
Then, if the stock price drops to $90, he buys back those same 100 shares at $90 and returns them to the broker.
Profit = ($100 - $90) × 100 = $1,000.
2. What is Short Covering?
If a trader's short-sold stock price starts to rise instead of falling, they will incur a loss! Therefore, to limit their loss, they will buy back the shares they sold earlier and close their position.
This "buying back and closing action" is Short Covering.
Buying back the sold shares to either profit (if the price falls) or to prevent losses (if the price rises) is what Short Covering is.
3. Short Covering - How does the price rise rapidly?
When multiple traders simultaneously engage in Short Covering, the orders to buy stocks in the market suddenly increase. This causes:
Demand increases → price rises rapidly.
This can cause a sudden spike for a stock, sector, or even an entire market index.
(Note: "Short Squeeze" is the extreme form of this).
4. How to identify Short Covering?
Some easily identifiable indicators:
- Decrease in OI (Open Interest) + price increase → Short Covering.
- Sudden rapid rise without any good news in Intraday.
- High Volume + Sudden Buying Pressure.
5. Important advice for traders!
- A Short Covering Rally is only a short-term (1-2 days) event. It does not change the long-term trend.
- Do not mistake this for a "Bullish Signal" (long-term profit)!
- To create a true Bullish Trend, technical support, support price, and the fundamentals of the company are required.
Short Covering = a "temporary spike" in the market (increase due to buying pressure; not sustainable).
Key Terms:
- Short Sell = selling borrowed shares
- Short Covering = buying back the sold stock to close the position
- OI (Open Interest) = outstanding contracts
WPB Market Voice - Tamil https://t.me/WPBMarketVoice. https://t.me/WPBMarketTalkTamil
WPB Voice Market
#Shortcovering #Trading #TamilTrading #StockMarket #STG #WPBVoiceMarket