The term "strong hands" refers to the ability/willingness of futures market participants to hold on to market positions in the face of adverse price moves. Since the margin requirements for the purchase or sale of a futures contract represent only a tiny fraction of the value of the futures contract, on average approximately 5% of the value, it is possible for market participants to obtain very signii cant leverage in the futures markets.
And although the leverage would act as a multiplier to increase returns if the participant correctly anticipates the direction of the price movement, either up or down, of the commodity or financial instrument that is represented by the futures contract, an adverse price move can result in significant losses due to this same multiplier effect. Many small investors are quickly forced to liquidate their positions during an adverse price move.
However, there is a class of market participant that is well capitalized, has a long-term view with respect to the direction of price and the conviction/ability to sustain temporary losses in pursuit of greater rewards. This group of investors is usually described as having "strong hands".
And although the leverage would act as a multiplier to increase returns if the participant correctly anticipates the direction of the price movement, either up or down, of the commodity or financial instrument that is represented by the futures contract, an adverse price move can result in significant losses due to this same multiplier effect. Many small investors are quickly forced to liquidate their positions during an adverse price move.
However, there is a class of market participant that is well capitalized, has a long-term view with respect to the direction of price and the conviction/ability to sustain temporary losses in pursuit of greater rewards. This group of investors is usually described as having "strong hands".
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| Strong Hands |
