Paper hands are investors who do not hold on to shares for long. They are the opposite of Diamond Hands, who hold on to a stock they are convinced of with diamond-like hardness. The concepts of “weak” and “strong” hands have been around forever. The fact that they are now called Paper & Diamond Hands has something to do with the slang of a blood young generation of online traders.
What does “Paper Hands” mean? Meaning, definition, explanation
We understand them most through their opposite, the Diamond Hands. These investors, some of whom have become billionaires, very thoroughly identify undervalued stocks with high upside potential, buy them, and are subsequently unshaken by market fluctuations, even crashes. This is justified to the extent that really good stocks actually rise on average and over long periods of time. However, this involves some basic conditions that one must be aware of. These are
a) fundamental key figures (P/E ratio, KBV, KUV, EKQ and more),
b) the positioning of the company including its management,
c) the industry and
d) the market environment.
Despite all the expertise and thorough research, the Diamond Hands’ strategy still doesn’t always work; some stocks fall. Some of the preferred companies even slide into insolvency. Overall, therefore, success with Diamond Hands also requires relatively broad diversification, so that in the end enough winning stocks remain. Paper Hands now either generally distrust this approach or do not follow through emotionally and/or in terms of their capital. Because holding stocks with Diamond Hands can only work with a certain diversification, a certain capital stock is also required for this.
If investors just bet on a single supposedly winning share and then observe price fluctuations, they can quickly tend to sell the asset again with weak hands or Paper Hands. They also sell high profits relatively quickly. They take what they can get, but they do not hold. Their hands are not suitable for holding, they are Paper Hands.
Why is there the discussion about Diamond and Paper Hands?
The behavior of investors has an impact on the share price. When Paper Hands quickly sell their shares again after a brief increase, the price falls, which occasionally annoys the diamond hands. The more relaxed among them, however, accept the effect: “The weak hands have sold, but that’s only temporary,” is then said from these circles. They take advantage of the drop in the share price to increase their position. The Paper Hands even do this occasionally, only to sell again all the more quickly, which can send the price on an eight-track ride. Paper hands have a precarious effect in the event of a very significant decline: they then tend to panic sell, which can trigger a crash. Basically
- Diamond Hands are investors with thorough research and strong nerves, and
- Paper Hands are investors with less thorough research and weak nerves.
Paper Hands are guided by rumors in the stock market and often chase the investment decisions of Diamond Hands. This would not be bad in itself if they did not sell at every price fluctuation.
Are Paper Hands to be condemned per se?
No. Stock markets sometimes move sideways and sometimes fall over longer periods. There are stock market years in which even the price of major indices is lower at the end of the year than in January. Although this is rare and usually only the case after interim crashes, such years do exist. The Paper Hands are therefore allowed to act in the short term with some justification. In principle, they are most likely to damage their own portfolio by doing so, because the many purchases and sales (quite a few of them at a loss) do not serve to build up a portfolio in the long term. However, there are alternatives for such investors, which we will show in the next section.
Where are Paper Hands best placed?
Paper hands represent a type of investor who tends not to think long-term and sometimes watches the stock market on a daily basis, sometimes even for many hours (or repeatedly during the course of trading). Holding stocks may not be the right strategy for them. This can of course be highly profitable. If you are 30 years old or younger today and want to provide for your retirement with shares, you can basically trust that your capital will increase by a factor of perhaps 30 over the next 40 years (currently invested 1,000 euros would then become 30,000 euros).
In 1980, the Dax stood at around 500 points (it has only officially existed since 1988); in September 2021, it will be over 15,000 points. But Paper Hands do not like to think like this or cannot feel like this. They are not able to make their money in their sleep, as the stone-aged great investor Warren Buffett recently put it. Possibly they also do not want to provide with shares for the pension, because they are for example no longer 30 years or younger, because they hope for a very short term super profit and/or because they discover completely different, most interesting possibilities at the stock exchange. This would be, for example, trading with derivatives. These map price movements in a leveraged manner and can move 100 percent (and more) in a single day. As put options, they can also gain on falling prices. You can follow prices in any direction with them. Also, trading is possible with very small capital investment of 100 euros or even much less. These investment instruments are suitable for day trading or very short-term position trading over a few days or weeks at most.
Day trading for Paper Hands
First of all, these trading models put the concept into perspective: the Paper Hands are no longer weak hands, which after all has a negative connotation, but rather decisive traders who react to changing market situations at short notice. However, short-term action requires a high degree of flexibility, along with powerful technical equipment and a highly reliable Internet connection, as well as a reliable broker with the lowest possible order fees.
Day traders observe the short-term intraday and weekly chart patterns and deduce from them in which direction the price could develop within the next minutes and hours. They set buy stops for call and put derivatives, closely monitor the entry of their position (which requires permanent market monitoring or notification of an acoustic signal) and set a well-calculated stoploss after the entry, which leads to the exit of their position at a defined point. Initially, the stoploss is slightly in loss, then in profit if the price development is good. Day traders want to see a development very quickly. In any case, they exit the position at the close of trading (20.00 to 22.00 h).
Some of them become scalpers and hold positions only for seconds to minutes at most, scalping away small price movements. Behind this is a very specific mentality, which is actually also that of Paper Hands: these people do not want to wait patiently for a development that they cannot influence. This state is unbearable for them. They want to act.
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Is both possible – long-term investment and day trading?
This kind of simultaneous investor and trader exists, but it is rare. Investment and trading decisions have a lot to do with one’s own personality. Those who are very fond of short-term trading are very reluctant to leave stocks with Diamond Hands forever.