Definitions
What is Short Covering?
Short covering is the repurchase of a sell position, and is a term used not only in the foreign exchange market but also in the overall financial market.
Short means that the position is short-selling.
However, although buying is called long, closing a buying position is not called long covering.
For example, if you sell EUR/USD from 101 USD, it will be a short of 101 USD.
Short covering is to buy back a sell position, but the point of view is not the person who owns the position, but the third party.
Even if you buy back a EUR/USD sell position, it does not mean that you short-covered the EUR/USD sell.
Price movement during short covering
When the short covering comes in, it is an image that investors who have a selling position in the falling market will step up due to the buyback of a large selling position.
The market is all selling, and because everyone has a selling position, it becomes difficult for the market to fall, and the market reverses and rises due to investors repurchasing, that is the short covering.
In addition, it is also called a short covering that investors who are short-selling at the time of a rising market cannot bear the loss and cut the loss.
In this case, the market price will be further stepped up, which will give further momentum to the rise.
When a short covering occurs, the market price is often rising fast.
It is said that it will rise sharply as a long-term downtrend progresses and investors with many unrealized gains move to profit-taking at once.
When short covering occur?
A short covering is likely to occur, before lunch time in Europe, or when there are important economic indicators or events after the market has moved significantly.
If you missed the downtrend, it may be a good idea to have a buy position in anticipation of a short covering or to make a buy stop loss position during those times.