‘Weak hands’ is a term often used to describe traders and investors who lack conviction in their strategies or lack the resources to carry them out. It can also refer 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 describes traders and investors who lack conviction in their strategies or the resources to carry them out.
- A lesser-known definition of weak hands includes futures traders who don’t intend to take, or provide, delivery of the underlying asset.
- Typically, weak hands buy at the highs and sell at the lows, due to fear and predictable trading patterns.
Analyzing the Behavior of Weak Hands
Weak hands typically refer to investors or traders who are driven by fear to exit positions quickly on almost any news or event that seems detrimental, resulting in suboptimal returns on investment (ROI). Such traders often follow a set of predictable rules and are easily ‘shaken out’ by normal market price gyrations, leading to buying at market highs and selling at market lows.
Weak hands may also include traders—not limited to a particular asset class such as forex, equity, fixed income, or futures—who approach the market more like speculators than investors. These traders usually enter and exit positions based on small price movements rather than holding positions with any conviction or substantial financial backing. A misconception is that of a futures trader who does not intend to take, or provide, delivery of the underlying asset, thus identifying them as speculators.
In all markets, weak hands showcase predictable behavior. This includes buying as the market breaks to the upside based on technical patterns or selling as the market breaks to the downside. Dealers and institutional traders exploit this by buying when weak hands sell and vice versa, forcing weak hands out before the market moves in the originally desired direction.
The Sentiment Factor
One significant challenge for investors and traders is buying or selling at the worst possible time. Typically, impulsive decisions are driven by fear during extreme market conditions, such as a bear market. When fears peak, valuations might be cheap, and technical charts might suggest buying rather than selling. However, weak hands only see danger.
Conversely, strong hands usually possess the resources and vision to capitalize on these periods. They can buy even when prices dip further, led by the assurance that market conditions will eventually improve.
Take the example of a strong company with solid fundamentals. If its stock falls just because a related company reports bad news, weak hands might quickly sell that stock. Meanwhile, a rebound can occur sharply because there was no fundamental flaw with the company initially. Strong hands recognize this as a buying opportunity.
Note: Investing involves risk, including the possible loss of principal. Always consider your investment objectives, risk tolerance, and financial circumstances before making financial decisions.
Related Terms: strong hands, diamond hands, trading strategies, market sentiment, ROI, market psychology
