Trading and Social Media

Social media is full of trading tips—but should you listen?


Using social media is one of the easiest and most expedient ways to share information. But when everyone has a platform, it can be difficult to distinguish reputable insights from ill-considered musings. Which raises the question: How can traders use social media to their advantage without being taken advantage of?
Here are three tips for doing just that.

1. Curate your sources

X (formerly Twitter) has become a go-to resource of breaking news and analysis from amateurs and professionals alike. As you refine your stable of sources, you should actively weed out self-interested and misinformed accounts—but be careful not to exclude a healthy mix of legitimate viewpoints in the process.
To that end, I suggest asking yourself a few questions before you select the Follow button:

• Does the source have a solid track record? You might be convinced by what they're saying today, but how often have they been right? Go back and check whether their past prognostications paid off or fell flat.
• Has the account been verified? Be cautious of accounts that lack a blue check mark—X's indicator that the account is verified is "complete, active, and non-deceptive", and that it has a confirmed phone number. That's not to say you should only follow verified accounts, but those without a check mark demand greater scrutiny.
• Is its perspective informed or dogmatic? If a source has been beating the same drum for months (or years) irrespective of market conditions and without any facts to back it up, steer clear. Instead, follow accounts whose perspectives are rooted in data and a demonstrated understanding of the markets.
• Does it challenge your biases or reinforce them? Social networks have a reputation for being echo chambers, so make sure to maintain exposure to different voices who might challenge your assumptions for the better.

2. Trust, but verify

I pay close attention to the stocks that people are talking about online—not because I'm looking for immediate trade opportunities, but because such conversations can spark new ideas or prompt me to reconsider existing positions.
For example, in the past, social media posts have prompted me to:

• Review volume trends for a popular meme stock after a tweet provided evidence that it could be falling out of favor.
• Revisit a potential trade candidate after the company shared a press release revealing its technology failed to deliver on its promise.
• Investigate why a beverage company withdrew previously issued earnings guidance after coming across a reposted headline.

 
That said, I use social media posts only as a catalyst for further research. I then put the stock through my usual rigorous process, applying disciplined fundamental and technical research to better gauge the opportunity—or lack thereof.

3. Don't mindlessly follow the herd

You may recall when Reddit users demonstrated the power of the crowd in 2021 when they drove the price of AMC Theaters, GameStop, and other underperformers to absurd heights; most of which fell precipitously afterward.
I try to keep an open mind when it comes to trying out new approaches, but I remain skeptical of social media-driven stock performance because all that attention can push the stock price beyond what's reasonable and make it harder to identify realistic profit and loss targets. If social media hype has driven a stock price two, five, or even 10 times higher, a thorough analysis of its fundamental and technical characteristics is likely to reveal that it's overpriced and overbought already. 
If you do decide to take a position in a trending stock, be mindful of your exit strategy and cautious about taking too big a position.

Pick and choose

At its best, social media is a source of limitless trading ideas—so long as you separate the wheat from the chaff. And no matter which tips you ultimately choose to pursue, be sure you do so for the right reasons. In a world full of get-rich-quick schemes, the opportunities you don't go after can be at least as advantageous as those that you do.