What it is:
How it works (Example):
Food production companies are likely to take delivery of the corn, wheat or other underlying commodity when they trade futures contracts. They are strong hands.
Speculators, however, are weak hands -- they essentially place bets on the future price of commodities. They don't want to take possession of the corn, wheat, etc.
Why it Matters:
Weak hands are placing bets rather than investing. They tend to be easily spooked by price changes, and they often tend to buy at the peak and sell at the trough. In both the futures and currency markets, weak hands are often blamed for big price swings, but they also provide liquidity to these markets.
Unpredictable price swings and the ability to trade on margin make futures trading and currency trading high-risk propositions. It takes a tremendous amount of skill, knowledge and risk tolerance. Investors who can identify when weak hands are in the market have a better chance of predicting the nature and degree of price changes.