Trading and Social Media

April 7, 2022 Randy Frederick
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

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 click 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—Twitter's indicator that the account is "authentic, notable, and active." That's not to say you should follow only 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, recent 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 that revealed its technology failed to deliver on its promise.
  • Investigate why a beverage company withdrew previously issued earnings guidance.

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

Reddit users demonstrated the power of the crowd in 2021 when they drove the share prices of AMC Theatres, GameStop, and other underperformers to absurd heights.

I try to keep an open mind when it comes to trying out new trading approaches, but I'm skeptical of social media–driven stock performance because all that attention can push the price beyond what's reasonable and make it harder to identify realistic profit and loss targets. If social media hype has driven a stock's 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 sometimes be as advantageous as those that you do.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

Investing involves risk, including loss of principal.

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