Weak Longs

What Are Weak Longs?

Weak longs are investors who hold a long position and are quick to exit that position at the earliest hint of weakness. This type of investor is ordinarily attempting to capture the upside capability of a security however without critical loss. These investors will quickly close their positions when a trade doesn't move in support of themselves.

Understanding Weak Longs

Weak longs are much of the time short-term traders instead of long-term investors since they are reluctant to hold their positions through market variances. In the event that a trade doesn't move in support of themselves, they will quickly close their positions and search somewhere else for opportunities. Most weak longs are momentum traders who are more keen on a quick profit than investing in undervalued companies until they arrive at a fair value.

When weak longs close their position, it might introduce an opportunity for different investors to buy into the dip. The selling pressure that weak longs make while closing their positions can lead to consolidation in a stock after a huge uptrend. This makes sense of why stocks will generally finish out subsequent to following a earnings announcement on the grounds that these traders lock in their profits and continue on toward other investment opportunities.

The benefit of a weak long is that the investor can get profits quickly instead of capitulating to the disposition effect, holding onto a losing stock for a really long time. In any case, weak longs will generally create significant stir in their portfolio, making it harder to stay profitable like using a long-term investing strategy.

Illustration of Weak Longs

At the point when a company reports good earnings for the quarter, short-term traders might buy the stock at the open to capitalize on the run-up while long-term investors might add the stock to their existing positions. Weak longs will hold the stock until it starts to consolidate following an earnings run-up, selling the stock and moving on to different opportunities. Long-term investors will keep holding the stock.

Long-term investors might exploit the consolidation to add to their position and lower their cost basis. Long-term investors might look out for the sidelines following a positive earnings announcement and buy the stock after it starts to move lower and consolidate. This permits them to buy the stock at a lower price and at last increase their long-term profit potential.