Strong Hands

What Are Strong Hands?

"Strong hands" is a colloquial term that can refer to well-financed or influential speculators or futures traders who wish to take delivery of the underlying asset upon a contract's expiration. Strong hands, in this context, are ones that can both move the market and also deal with the hassles and costs associated with physical delivery. As such, these players are also sometimes referred to as the "smart money".

The term "strong hands" has taken on new meaning with the rise of cryptocurrency "HODLers" and so-called meme stocks that form communities online and via social media. Here, "strong hands" (also known as "diamond hands") refers to the intention to keep holding on long positions even in the face of falling markets or bearish sentiment.

In either case, strong hands may be contrasted with weak hands.

Understanding Strong Hands

Strong hands are key players that can move the market or withstand short-term setbacks. As such, these are often financial institutions or banks. Strong hands exist in all markets, but take on a special role 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.

Other Considerations

A deep-pocketed 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, that 10% could be considered strong hands because they are on the other side of 90% of traders in that market. This is possible because that 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 in Online Finance Communities

Online communities such as the Reddit forum r/wallstreetbets saw a surge in growth in 2020 and 2021 as the subreddit became the face of the incredible upward surge of heavily shorted companies like Gamestop and AMC Entertainment. Described as a cross between 4chan and the Bloomberg terminal, the forum had over 10.8 million members in Aug. 2021, hundreds of thousands of whom are active on the page at a time.

The terms "strong hands" and "diamond hands" have come to mean on these forums, continuing to hold a stock despite losses, adversity, and volatility, confident that the price will increase. The phrase is represented by a combination of diamond and hand emojis: 💎🤲. When GameStop and AMC shares traded wildly, calls for users to have “diamond hands” filled the forum.

HODL is another online term derived from a misspelling of "hold" that refers to buy-and-hold strategies in the context of bitcoin and other cryptocurrencies. HODL (pronounced "hoddle") originated in 2013 with a post to the Bitcoin Talk Forum. The price of bitcoin had surged to a high of over $1,100 at the beginning of December 2013 from under $15 in January 2013. On Dec. 18 — possibly in response to reports of a Chinese crackdown — the price of bitcoin fell 39%, to $438 from $716, according to CoinDesk's bitcoin price index. At 10:03 a.m. UTC on Dec. 18, GameKyuubi posted "I AM HODLING," a drunk, semi-coherent, typo-laden rant about his poor trading skills and determination to simply hold his bitcoin no matter what from that point on.