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How Traders Are Using What You're Saying on Social Media to Determine the Direction of Stocks

Tech firms are looking beyond the numbers, offering recommendations to the financial world based on what YOU are tweeting, posting on Facebook, tumbling and so on. Casey Stegall reported that companies are using social media in a profound new way, by taking what people are saying online in order to determine stock value.

If there’s a trend of people who are excited or worried about something, traders can use that information to tell whether a stock will go up or down. One study found that what people are writing on their social media accounts can actually predict the direction of the Dow, and sometimes even days in advance.

Online reviews are a big tip to what consumers really think about products, services and companies. Stegall said, “When USC researchers sold stocks based on negative reviews, they earned eight percent more.”

Companies such as MarketPsych specialize in this type of research and then sell its findings to hedge funds, banks and brokerage firms. Richard Peterson, who works for MarketPsych, explained that they look out for a big event like the financial crisis. He said, “Now a lot of the time you’ll be wrong, you might get only 50 percent directional accuracy so to speak. But when you catch those big events, if you’re right 10 percent of the time … that type of event will make your profit score even the year.”

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