What are Strong Hands?
- Strong hands is a colloquial term that can refer to well-financed speculators or futures traders who wish to take delivery of the underlying asset.
- Strong hands are key players in the market, as these are often companies, financial institutions, hedge funds, and/or mutual funds.
- Strong hands are also sometimes referred to as the "smart money."
Understanding Strong Hands
Strong hands are key players in the market, as these are often companies, financial institutions, hedge funds, and/or mutual funds. Strong hands exist in all markets, but take on a special role in futures trading.
The well-financed speculator can be a strong hand in any market. For example, if 90% of speculators with positions in crude oil futures are long, that means 10% of people are short. Since each buy transaction requires a sell transaction, the 10% could be considered strong hands because they are on the other side of 90% of traders in that market. This is possible because the 90% may be composed of many small investors. In order for the 10% to take the other side of all those trades, this must be a much more well-financed group, capable of taking on larger positions.
Not all traders within the 10%, in this example, are strong. Nor are all the traders within the 90% weak. Yet the example shows that when prices move they can end up in stronger and stronger hands. This, in turn, can be used to help traders watch for price reversals. As more and more traders become concentrated on one side of the market, this creates a bullish or bearish extreme. There is no one left to keep pushing the trend in the current direction, and thus it reverses. In the example above, with 90% of traders long, the market is at a bullish extreme and is subject to reversal.
In financial markets, when sentiment indicators are extremely bullish or bearish, this typically means that many small investors are on one side of the market and strong hands are taking the other side of those positions, which could lead to a price reversal. Well-financed speculators don't become, or stay, well-financed by making poor decisions. Strong hands are also sometimes referred to as the "smart money".
Strong Hands in Futures Trading
Most futures contracts are closed before expiration. Strong hands could be well-financed speculators, but they could also be futures traders who hold until the expiration of the contract. These are the people who need to buy or sell a commodity as part of their business. Of all the trades that take place in the futures market, only about 2% are held until expiration. Since this group cannot be shaken out of their positions, they are considered strong.