What are 'Weak Hands'

In the financial markets, investors or traders have weak hands when they lack either the conviction to stick with an investing or trading plan or they lack the resources to carry them out.

This could be a futures trader that never intends to take or provide delivery of the underlying commodity or index. However, weak hands more likely refers to an investor or trader who quickly exits a trade on almost any detrimental news or a break from an obvious technical pattern on the charts.

BREAKING DOWN 'Weak Hands'

A futures trader with weak hands is generally a speculator, and more likely a small speculator, who enters and exits positions with the intention of reversing those positions well before expiration. Typically, this is a trader without the financial resources associated with the delivery and storage of the underlying commodity.

In all markets, weak hands investors and traders exhibit predictable behavior. This can include buying immediately after the market breaks out to the upside from a technical pattern on the charts or selling immediately after the market breaks to the downside. Dealer and institutional traders will exploit this behavior by buying when weak hands traders sell and selling when weak hands traders buy. This forces out the weak hands out before the market starts to move in the originally desired direction.

The Sentiment Factor

The most glaring problem for investors and traders is buying or selling at the very worst time. For example, when a bear market nears its end, the news is at its worst. Losses for those who held on as the market fell are at a maximum and fear becomes the driver in people's minds. However, valuations are likely to be cheap and charts might point out technical conditions conducive for buying, not selling.

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

Since major bear markets are relatively infrequent, a more likely example of weak hands is when the stock of a strong company with solid fundamentals and chart patterns falls in sympathy with the stock of a related company that issues bad news on earnings or some other business event. Weak hands quickly sell but the stock rebounds sharply. There was nothing wrong with that stock in the first place.

It is not unlike throwing the baby out with the bathwater. Only the second stock had problems so the price dip in the first stock was a buying opportunity.

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