Terms

Weak Hands What it Means and how it Works

Weak Hands What it Means and how it Works

Weak Hands: What it Means and how it Works

What Are Weak Hands?

"Weak hands" is often used to describe traders and investors who lack conviction in their strategies or resources to carry them out. It also refers to a futures trader who never intends to take or provide delivery of the underlying commodity or index.

Weak hands can be contrasted with strong hands, or "diamond hands."

Key Takeaways

  • Weak hands describe traders and investors who lack conviction in their strategies or resources to carry them out.
  • A less-known definition is that of a futures trader who does not intend to take or provide delivery of the underlying asset.
  • Weak hands buy at the highs and sell at the lows, a surefire way to lose money.

Understanding Weak Hands

"Weak hands" typically refers to an investor or trader who quickly exits positions on any news they consider detrimental due to fear. This results in realized losses and suboptimal returns on investment. They follow predictable rules and are easily "shaken out" by market price movements. The result is buying at the highs and selling at the lows, a surefire way to lose money.

Weak hands can also describe a trader (forex, equity, fixed income, futures, or any other class) who approaches the market as a speculator rather than an investor. They enter and exit positions based on small price movements and lack the conviction or financial resources to hold on to their positions. A less-known definition of weak hands is that of a futures trader who does not intend to take or provide delivery of the underlying asset.

READ MORE  Voluntary Liquidation Definition and How It Happens

In all markets, weak hands exhibit predictable behavior. This includes buying after the market breaks to the upside from a technical pattern or selling after the market breaks to the downside. Dealers and institutional traders exploit this behavior, buying when weak hands sell and selling when weak hands buy. This forces weak hands out before the market moves in the desired direction.

The Sentiment Factor

The biggest challenge for investors and traders is buying or selling at the worst time. For example, when a bear market nears its end, the news is at its worst. Losses are at a maximum, and fear becomes the driver in people’s minds. However, valuations may be cheap and charts might point out technical conditions conducive for buying.

At this point, sentiment is extreme for bearishness, and weak hands only see the fear. Conversely, strong hands, who are well financed, see the opportunity. They can buy even if the price dips further because they have the resources to handle the drawdown.

A more likely example of weak hands is when the stock of a strong company with solid fundamentals and chart patterns falls due to bad news from a related company. Weak hands quickly sell, but the stock rebounds sharply. There was nothing fundamentally wrong with that stock in the first place, so the price dip was a buying opportunity.

Leave a Reply

Your email address will not be published. Required fields are marked *