The long-short ratio shows the proportion of traders with long positions versus the proportion of traders that are in short positions, and is used as an indicator of market sentiment.
To determine market sentiment, we want to look for extreme values in the long-short ratio. If a high proportion of traders are long, then it may mean that the market is near a top as sentiment becomes extremely bullish. On the other hand, if a very high proportion of traders are short, then it could indicate that the market is bottoming since sentiment is becoming extremely bearish.
The long-short ratio can be used to gauge for short squeezes - this is where a large number of short sellers are squeezed out of their position due to a rising price. Short sellers use leverage to bet on falling prices, but if the price moves in the opposite direction, then many of those traders who went shorts will get liquidated, leading to what is known as a ‘short squeeze’. Sellers exit their positions as the rising price eats into their PnL, which adds to existing buy pressure and forces the price higher.
If there are more short positions than long positions, i.e., the long-short ratio is below 1, then it may be indicative of conditions for a possible short squeeze.
The data provided on Datamish is from Bitfinex, showing various charts illustrating the magnitude of long-short positions as well as the ratio between the two:
In TradingView, you can type ‘BTCUSDLONGS’ or ‘BTCUSDSHORTS’ to see the level of long or short positions on the Bitfinex exchange.
You can also open up two charts in one screen to compare long and shorts on Bitfinex at the same time:
Bybt offers a more extensive collection of long-short ratios which can be viewed over different assets, exchanges and timeframes.
For example, you can view the long-short ratio for BTC-USD based on the 15-minute, 4-hour or 1-day timeframe, look at the long-short ratio for a particular exchange or find the ratio for different crypto-assets such as ETH or LINK: