Weak hands is a pejorative term in financial markets that refers to speculators that are frequently wrong about their bets. Traders that fall under this category have predictive behaviors due to their inexperience or inability to control emotions just to name a few.
Traders characterized as weak hands apply patterns and strategies that more savvy players tend to exploit to their advantage. How? For instance, weak hand players act as a source of a strong hands’ needed liquidity to fill their orders at optimal prices with reduced slippage.
Whenever you see an acceleration move that eventually leads to a false breakout, this is one of the typical patterns I am referring to. These false moves typically have ‘weak-hands’ involved, and is a great way to illustrate the actions of weaker hands from the strong.
To exemplify the above, let’s look at the chart below. RUNE or ThorChain vs Bitcoin. What do you notice? The red dots are predictable areas where weak hand buyers would be shaken out, which ironically is a pristine location to jump on the trend. False breakouts (liquidity grabs).
At the end of the day, aside from fully automated systems where the decision-making process is delegated to an algorithm, weak hand manual traders are humans with a tendency to be influenced by their primal brain, which exhibits common behavioral patterns.
This inevitably leads to making decisions off emotional impulses where irrationality prevails. Too often, it results in weak hand players buying or selling at the very worst time. In other words, at or new the lows of a bear market or at or near the end of a bullish market.
When this happens, it doesn’t take much of a setback for these traders to be put upside down, panic and eventually take the loss, or worse still, suffer a margin call. When sentiment is extremely bearish, all weak hands can see is the fear whereas strong hands see opportunity.
Another common characteristic of weak hand players is that they fail to hold to the asset tightly with conviction. Instead, they chase “action” by actively buying and selling with little patience if price doesn’t fairly soon in their favor. And when/if it does, they take profits quickly.
Unlike weak hands, the strong type can buy at different price intervals due to the sizeable capital allocation, risk control parameters, all well aligned within a plan of engagement. This plan can be based off fundamental valuations and/or technical analysis.
Besides, whenever strong hands experience a drawdown, they typically tend to have sufficient resources at their disposal to weather the storm and handle it due to the account size, use of options as opposed to tight stops, or active hedging strategies.
Weak hand players fail to read the market’s ebbs and flows. They are yet to learn powerful concepts such as discounted entries, liquidity grabs, balanced risk exposure, risk reward prospects, and a plethora of other factors that without it, it undermines positive outcomes.
Another common feature of weak-hand players is that they are not nearly as equipped in the intel domain vs what gets to be deployed by market makers and seasoned traders. The latter leverage off all type of technological advances as a source to enhance their market edge.
Strong hands can also be an unshakable force due to market manipulation. This is a known practice whereby parties can become strong hands because they have access to privilege information that allows them to corner a market and accumulate an asset through systematic buying over days, weeks, or months at the expense of the little retail traders that gets constantly whipsawed.
To summarize, we understand weak hands as traders led by emotions and easily shaken out of their position for various reasons, predominantly revolving around inexperience and/or inability to handle the psychological game. This makes them an easy pray to be hunted down by the stronger actors.