Weak Longs

Weak longs are investors who hold a long position and are quick to exit that position at the first sign of weakness. This type of investor is typically trying to capture upside potential in a given security but is not willing to take much loss. These investors will quickly close their positions when a trade does not move in their favor.

Weak longs are often short-term traders rather than long-term investors because they are unwilling to hold their positions through market fluctuations. If a trade does not move in their favor, they will quickly close their positions and look elsewhere for opportunities. Most weak longs are momentum traders who are more interested in making a quick profit than investing in undervalued companies until they reach a fair value.

When weak longs close their position, it may present an opportunity for investors to buy into the dip and reduce their cost basis. The selling pressure that weak longs create when closing out their positions can lead to consolidation in a stock following a significant uptrend. This explains why stocks tend to top out after following an earnings announcement because these traders lock in their profits and move on to other investment opportunities.

The benefit of a weak long is that the investor can lock in profits immediately rather than succumbing to cognitive biases such as the disposition effect – or holding onto a losing stock for too long. The drawback is that weak longs tend to generate substantial churn in their portfolio and it can be harder to remain profitable over the long term compared to a strategy of long-term investing.

Suppose that a company announces favorable earnings for the quarter. Short-term traders may buy the stock at the open to capitalize on the run-up while long-term investors may add the stock to their existing positions. Weak longs will hold the stock until it begins to consolidate following an earnings run-up. At that point, they may sell the stock and move on to other opportunities. Long-term investors will continue holding the stock over the long term.

In addition, long-term investors may take advantage of the consolidation to add to their position and lower their cost basis. Long-term investors may wait on the sidelines following a positive earnings announcement and buy the stock after it begins to move lower and consolidate. This allows them to buy the stock at a lower price after the dust has settled and ultimately increase their long-term profit potential.