What are weak longs?
Investors who keep long positions but quickly sell them at the first hint of a downturn are known as weak longs. Usually, the goal of this kind of investor is to profit from a security’s upside potential without suffering a significant loss. These investors will swiftly liquidate their holdings when a deal does not turn out well for them.
Recognizing Weak Longs
Weak longs need help with their holdings during market changes, making them more likely to be short-term traders than long-term investors. They’ll rapidly shut down their positions and hunt for other possibilities if a deal fails. Most weak longs are momentum traders who are more concerned with making a fast profit than holding onto cheap stocks until they are reasonably priced.
Weak longs closing their positions might allow other investors to take advantage of the downturn. After a large rally in the stock, the selling pressure that weak longs produce when they close their holdings may cause a store to consolidate. Equities often peak after an earnings report because these traders lock in their winnings and move on to other trading possibilities.
A weak long allows the investor to lock in gains immediately instead of letting the disposition effect cause them to hang onto a losing stock for an extended period. Nevertheless, poor longs can cause significant portfolio churn, making it more challenging to maintain profitability, for example, using a long-term investment approach.
Illustration of Weak Longs
Short-term traders may purchase the stock at the opening to profit from a run-up when a business reports quarterly solid gains, while long-term investors may add the shares to their current investments. After an earnings run-up, weak longs will keep the stock until it consolidates; at this point, they will sell it and pursue other chances. Investors with a long tenure will hold the stock.
The consolidation may allow long-term investors to increase their holdings and reduce their cost base. After a strong earnings report, long-term investors can decide to hold off and purchase the stock when it declines and consolidates. As a result, their potential for long-term profit increases, and they can buy the shares at a reduced price.
