What is Weak Hands?

"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. It also refers to a futures trader that never intends to take or provide delivery of the underlying commodity or index.

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 of the term 'weak hands' 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

The term "weak hands" typically refers to an investor or trader who is driven by the emotion of fear to quickly exit positions on almost any news, or event, that they consider detrimental, resulting in realized losses and sub-optimal returns on investment (ROI). They tend to adhere to a set of rules that makes their trading activities predictable and are easily "shaken out" by normal market price gyrations. The net result being that they end up buying at the highs and selling at the lows, a surefire way to lose money.

A "weak hand" can also describe a trader (forex, equity, fixed income, futures, or any other class) who approaches the market from the viewpoint of a speculator, and more likely a small speculator, rather than an investor. They will normally enter and exit positions with the intention of reversing those positions based on small price movements. Typically, this is a trader without the necessary conviction or financial resources to hold on to their positions. A less known definition of the term "weak hands" is that of a futures trader who does not intend to take, or provide, delivery of the underlying asset. This, by default, lumps them as a speculator.

In all markets, "weak hands" 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. Dealers and institutional traders will exploit this behavior by buying when "weak hands" sell and selling when "weak hands" buy. This forces 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 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 fundamentally wrong with that stock in the first place. So the price dip was a buying opportunity.