Can Twitter Predict the Stock Market?

Can Twitter Predict the Stock MarketOne of the most important platforms people use to vent out their feelings is social media.

Even when it comes to trading, a lot of people like to voice their opinion or tell what they are feeling towards the market.  Some do it so that they can get some valid explanation or justification as to why the market is behaving this way or some do it just because they are used to telling it out loud.

This is what makes social media platforms like Twitter so powerful. Social media can be mined for data that reveals what people are thinking and feeling. And that, in turn, could translate into powerful investment ideas.

Twitter: A powerful tool for stock trading

Twitter is particularly useful. Usage of social media like Twitter has exploded in recent years, giving analysts a real-time reflection of popular sentiment. There are close to 400 million tweets every day and they range from a variety of topics, which also includes the stock market.

Apart from that, it also covers a wide variety of moods, i.e. people actually express how they are feeling towards a particular issue through their tweets. A lot of Institutional Investors, online brokers and retail investors are very active on Twitter, providing their valuable information through hash tags.

Financial Markets and Human Sentiments

A basic premise of behavioral economics is that the markets aren’t perfectly rational machines, but are expressions of human emotions like greed and fear. Twitter is one of the greatest tools ever invented for an immediate gauge of those human sentiments. This fact has been used by a lot of analysts to come up with a brilliant idea.

Analysts have invented tools that can use these millions of twitter feeds to filter topics and then judge the emotions of each individual towards a particular subject. This approach has been used pretty effectively to monitor the market and predict market changes based on the Twitter feeds.

Data Crunching

One has to remember that there is a huge amount of nonsense on twitter and tweets are flooded with useless bicker. So filters have to be specifically designed to cater to one’s requirements. Analysts use a number of indicators to analyze these tweets and provide traders with alerts on events. They pick up socially expressed emotions on Twitter in real time and then use them to analyze and predict the market, something which is not available on traditional news channels.

The difficult part is not data collection, but data crunching. For example, there might be some 400 million tweets generated every day. From that, we have to first filter those tweets which are useful/ important for us. Once that is done, the next big hurdle is studying those keywords to predict the mood of the people through their tweets.

This is a recursive approach and would require analysis at different levels. One has to consider hundreds of factors while analyzing these tweets, then sort data according to the requirements and then provide results based on the mood of the public towards a particular instrument. Then there are lots of ways these generated results can be used. Analysts don’t always go with the general public opinion and some market analysis is necessary before a final result. 

Social Media means Real Time Data

The biggest benefit of using social media is that the data sets on which one is working is immediate. It is much better than taking a survey every week. The data one is working on is genuine and is personal. People are not hesitant to say what they want to say. The social-media sentiment analysis is immediate and outgoing. One has to accept that the markets are moved by emotion. Many analysts think this is going to be the future of trading. One can actually see global moods moving up and down in real time.

In an interesting paper in The Journal of Computational Science called “Twitter moods predicts the stock market”, authors Johan Bollen, Huina Mao and Xiaojun Zeng start by arguing, “Behavioral economics tells us that emotions can profoundly affect individual behavior and decision making.”

They wanted to find if “Twitter feeds are correlated to the value of the Dow Jones Industrial Average (DJIA) over time.”

They found that by including the effects of public moods and opinions, the accuracy of DJIA predictions can be significantly improved. They found an accuracy of about 86.7% while predicting the changes in the closing values of the DJIA.

What we think

All this said and done, it is actually not that easy to dive into this domain as a private investor and start analyzing Twitter Data to make investment decisions. It is easier for Institutional Investors to start because they have their own proven models to predict the market and they can thus test this twitter driven model to see how effective it is.

They can tweak the new model in ways so that it matches and behaves according to their already existing model.  Apart from that, given the amount of data we are looking at it is very difficult for individual investors to think they can make any sense of the 100 million active Twitter users.

Authentication of data is another problem as there are a lot of users who aren’t even verified and therefore your results might be disturbed by the wrong information from these unconfirmed sources. So you must be experienced enough and should have the tools to leave out such information or account for them.

But on the whole, there have been cases where Twitter-driven data has been effective in the predicting of particular stocks on the stock market and this tool has a lot of potential if explored well. There were also case studies as how Twitter-driven models were actually able to predict the disappointing debut of Facebook on the Stock Exchange. We thus have to realize how social media is not just a platform to vent and share, but a platform to learn, analyze and understand as well.

About Punit_Gupta

Punit Gupta is an entrepreneur and full time stock trader. Punit specializes in building startups by bootstrapping. Currently Punit is developing a brokerage selection platform, CompareBroker, and a Social Platform for Traders, TheTradeStreet. Punit attended Georgia Institute of Technology Atlanta and worked with an Atlanta based startup for 7 years before quitting to start his ventures.

Comments

  1. I think Twitter definitely has the potential to give a very accurate picture of current trends. More and more, people are turning to the site to voice their reactions to current events, news, things like that. Twitter has really become the source of where popular opinions are as they are happening. With a little searching, you can uncover possible outcomes in the market, see what others like, what others are running away from, perhaps even quicker than financial websites that are specifically designed to give us that information.

    • Punit_Gupta says:

      Hi,

      Yes I definitely think there are bigger things to come. Twitter can prove to be very useful in situations where public sentiment plays an important role.

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  2. Hi Punit,

    I agree with Paul, that Twitter is a great way to gauge public real-time trends. I think if it was used sophisticatedly and with the right tools and methods this could work. But then I got thinking about what this could do for predicting crime and where police should deploy resources in real-time. Not sure why my brain made that link, but I am guessing that if you can use it for stocks and shares you can use it for other things too. :)

    Beth :)

    • Punit_Gupta says:

      Hi Beth,

      Yes indeed we can think of so many ways where Twitter can be useful. Would indeed love to see how it works for other situations/conditions.

      Thank you for taking out time and reading the article.

      Punit

  3. Good topic Punit,

    In a way yes, it can predict the future.

    If you followed me last year you know that I predicted the #AAPL run up and DECLINE.

    Add to it that there are ETFs and other spambot trading machines that exploit news reporting yeah I think you might find a way to predict an accurate trade here or there.

    • Punit_Gupta says:

      Thanks. I hope we see some new tools developed by using twitter feeds,

      No I think I missed your prediction about #AAPL. It would be great if you can post the link here,

      Thanks

  4. Thanks for sharing this article with us. Your article is good and interesting. It has helped me a lot to gain knowledge about something new.

    • Punit_Gupta says:

      Hi,

      Thank you for your appreciation. Watch out for my next article. I will try to combine social media with Stock Trading in my next article

      Punit

  5. how can twitter predict a stock market, only expert can only do this

    • Punit_Gupta says:

      Hi,

      Yes it is easier for Institutional Investors to foray into this domain. It would be interesting to see some of the result sets.

      Punit

  6. Very interesting. And here I was happy with myself because I was able to load a picture to my heating & cooling company’s twitter page. Who knew twitter could be a broker’s tool? Way to use your resources! Kudos to those who can use it to their advantage, as for me, I’m still just figuring out the basics.

    • Punit_Gupta says:

      Hi,

      I had the same feeling when I came to know how powerful twitter can actually be. Thank you for appreciating the article

      Punit

  7. Very true. I think by following the gurus of Stock market you can get some idea about coming days stock performance and you can select the stock which is ready to break out. Thank for sharing

    • Hi,

      Junaid a lot of full time traders actually do that. This is a very popular Stock Trading Technique. Twitter gives you a lot of data in real time and people actually decide on their Trading Strategies after that.

      Punit

  8. Hi, great post!! I liked every bit of it. I loved the way the importance of social media has been described with good examples.

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  9. Its actually very beneficial for individual investors because some people have no idea about the stocks & the figures. I never understood this number crunching, stocks and all, so its going to be interesting. Thanks for the post.

    • Hi Sam,

      This is exactly why Twitter is so powerful. People already use it to follow other traders and use their advice to develop their own trading strategies.

      Punit

  10. Amazing article wrote have you i liked it..this is not easy to write such a great article like you thumb up for u..

  11. really Great article . twitter is great way for online communicate ..!

  12. Well, I guess that there is some golden mean in all this. Following people on Twitter who are experts of the stock market can be also very useful., ans can help you to predict some changes

    Thanks a lot for such an interesting post!

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    • Hi Julia,

      Its great to know that you found the article interesting. My next article will focus on what you are hinting at: “How Traders can create a reputation for themselves on Social Media Platforms?”

      Regards
      Punit

  13. With this post, I can really say that social network is indeed not just merely for entertainment but an awesome business tool ;)
    thanks for sharing a very intresting and informative Article … :)

  14. Very cool. While the stock market and I don’t get along very well, like my wife, it likes to take my money, I think this is just mind blowing how a social media site can be used for such things. But, it does make sense with so much constant interaction I can see how it would be good indicator for market trends. Thanks for sharing this article. Since discovering weblogbetter.com, I’ve read quite a few of your articles and really have enjoyed them.

  15. Interesting theory, I wondering if your right?

    If so traders better start opening twitter account!

  16. Thanks for the great info Punit. The social media has become so powerful that before you go into investment or any other thing, you must take a look at the social media. The financial market is also predictable by twitter and is a good ground for investors to look in before making investment decision. I think the social media has life more easier for everyone of us, though it has its downside as well.

    Once again, THANKS PUNIT

  17. The social media has become so powerful that before you go into investment or any other thing, you must take a look at the social media. The financial market is also predictable by twitter and is a good ground for investors to look in before making investment decision. I think the social media has life more easier for everyone of us, though it has its downside as well.

    Once again, THANKS PUNIT

  18. I do not think that we can predict the stock market by using twitter. Even with many cases today that show that it can be done. Many things that affect companies stock prices will never even surface on twitter.

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