Tuesday, January 18, 2011

My Thoughts on Twitter/Trading & Adaptation (SPY)

I have been a part of the community observing, absorbing, and learning the ins and outs of collective human thought across the twitter medium for a number of years. Over this period of time I worked to hone a strategy discerning the "noise" from the real nuggets of actionable information which lead me to the "special" stocks of the day. These "special" stocks happen to be the ones which are in play but may not be on the mainstream media radar.

People/investors ask me if there is some sort of quantifiable formula behind my strategy of utilizing all that twitter brings us traders..... I always say there is a system which I follow in regards to pre determined loss and profit goals though the other half of the trade is based on feel and as queer as it sounds its an art. There is an art to understanding human thought process as a whole presented within the twitter medium. I can sit at a laptop and watch tweets, charts, news and then decide with greater than 59% accuracy which way the stocks will move and I use options to play the move.

Lets talk efficient market theory in relation to real time information flow mediums such as twitter for a quick second.. Everyone on twitter  has access to the same information… True to a point....they do have access to the information...... but do users know how to efficiently interpret the information and derive a signal from the information? Doubtful, though i do. 

The online twitter community is thought to be a collective of rational individuals who are making
RATIONAL decisions regarding their own personal investments… Eh not all true...a little proof 50cents recent tweets.. There was no rationalization for most of the buyers of the stock, just the hype and excitement of buying a stock sucked them in and hopes of rich's.

Twitter and blogging has drastically increased the speed at which information flows and the the reach of this information is vast.. A great example of increased speed of information in flow in trading which older traders know a bit about, is  …. Dan Dorfman … He was basically one of the first journalists to really use the medium of television to disseminate market information to the masses…(yes I know he was jailed for some dumb things he did etc etc but hear me out)... social media/blogging is the new medium today…. 

I guess you are all wondering what would happens with stocks Dorfman would speak about on cnn & early cnbc etc if are not familiar? They would MOVE and run the heck over market makers on the floor because they had no idea in heck why these stocks were moving. Floor traders called it getting "dorfed"…. Now you wonder why there are televisions all over the floor of exchanges…. it was for this very reason...... traders needed to see who and what was being spoken about on television. If traders saw him speaking or anyone for that matter about a stock they were making a market in the traders could hedge themselves and or get out of the way to not get run over… At the time television was the NEW THING…not all hedge funders and PM's watched TV…. Now EVERYONE DOES….…Now for the parallel….

…..Now you have twitter, blogging etc… If you trade without these mediums in front of you displaying information you might get modern day "dorfed" because twitter/blogs could be alive with all the reasons why the stock your long is shitting all over itself and you cant find out any information on the catalyst for the move via mainstream readily available sources…. 

I believe the great majority of day/fundamental/swing etc traders in the world are still not fully aware of twitter/blogging about trading trends and happenings helps one join a school of fish navigating the markets as if the old trading floors are alive again in regards to information and idea flow...... As for the skeptics of twitter/blogging i feel they are much like those who doubted dorfman's ability to move stocks via television….a shift is among us… To the new medium of information exchange and dissemination… 

My incorporation of twitter/blogging into my trading plan is a dovetail theory of efficient market theory…. I have access to a great deal of publicly available information PLUS I use & exploit(profit) from the human screener…. A massive school of fish sharing links/ ideas and "trades.. … Hedge funders and PM's maybe slow to adopt twitter and monitor the flow of tweets through different verticals (organized tweets by topic) but I think they all soon will because collective thought can create momentum in either direction. I am sure a lot of funds are using key word recognition software which quantify's sentiment etc though what I do is more of feel and scenario recognition from learned via trial and error. I apply a technical approach to trading learned over the years pre twitter to the modern market with much success.