What Are Weak Hands?
You've probably heard the term 'weak hands' thrown around in trading circles. Let me explain it directly: it describes traders and investors who don't have strong conviction in their strategies or simply lack the resources to stick with them. It also applies to futures traders who never plan to actually take or provide delivery of the underlying commodity or index.
You can contrast weak hands with strong hands, often called 'diamond hands,' which are the opposite—those who hold firm no matter what.
Key Takeaways
- Weak hands is the term often used to describe traders and investors who lack conviction in their strategies or lack the 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 end up buying at the highs and selling at the lows, a surefire way to lose money.
Understanding Weak Hands
When I talk about weak hands, I'm referring to investors or traders who get scared easily and exit their positions at the first sign of bad news or any event they see as negative. This leads to realized losses and poor returns on investment. They follow predictable rules, making them easy to shake out during normal market ups and downs. The end result? They buy at the peaks and sell at the bottoms, which is a guaranteed path to losing money.
Weak hands can show up in any market—forex, equities, fixed income, futures, you name it. These are speculators, often small ones, not true investors. They jump in and out based on tiny price moves, lacking the conviction or cash to hold on. There's also that lesser-known angle: in futures, weak hands are those who aren't there for delivery; they're just speculating.
In every market, weak hands behave in ways you can predict. They buy right after a breakout to the upside or sell immediately after a downside break. Dealers and big institutional traders take advantage of this—they buy when weak hands are selling and sell when they're buying. This pushes the weak hands out just before the market heads in the direction they originally wanted.
The Sentiment Factor
The real challenge for any trader or investor is avoiding buys or sells at the absolute worst moments. Take a bear market nearing its end: the news is terrible, losses are maxed out for holders, and fear takes over. But valuations are cheap, and charts might signal it's time to buy, not sell.
At that extreme bearish sentiment, weak hands only see the fear. Strong hands, with their solid financing, spot the opportunity. They can buy even if prices dip more, because they have the resources to weather it.
Bear markets aren't everyday events, so consider a more common scenario: a strong company's stock drops because a related company reports bad earnings or some issue. Nothing's wrong with the first company's fundamentals, but weak hands sell fast. Then the stock rebounds sharply—it was just a buying opportunity all along.
Disclaimer
Remember, I'm not providing tax, investment, or financial advice here. This information doesn't consider your specific investment objectives, risk tolerance, or financial situation, and it might not suit everyone. Investing carries risks, including the potential loss of your principal.
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