Sunday, May 24, 2009

Twitter as a Virtual Analyst

When I first began my participation on Twitter, that app was not the household name it is now. What appealed to me about Twitter was that it was what I called at the time "a blog within a blog". In posts of 140 characters or less, I could pass along information in real time much more efficiently than through an endless series of blog posts.

In those early days, only a couple hundred people were following my tweets. Most of the tweets were links to news articles, blog posts, and sites that I thought provided useful information to traders. One day, after working with hedge fund portfolio managers, I thought about the analysts that they had available to them and the ways in which those analysts provided a useful trading edge. It struck me that the tweets themselves could serve as a kind of virtual analyst. As I began using Twitter for explicit decision support, to my surprise, the tweets became almost as popular as the blog itself, with over 4800 people now following the stream.

The idea behind Twitter as a real time analyst is that the tweets provide traders with background information to aid their trading--not with trade ideas themselves. This is a very important distinction. The goal is to increase traders' mental bandwidth by providing a set of eyes and ears on markets, even as the trader is immersed in short-term price action.

Consider the following tweet from last week:

10:56 AM CT - ES testing its opening level; financials bk near highs for AM; 13 stks up, 27 dn; still broad mkt weakness.

The S&P 500 e-mini futures had declined from their opening price and then rallied back toward the open. That's what a trader fixed on the chart would see. What the Twitter analyst added was that, although there was strength among financial stocks, there were still signs of broad market weakness. Of the 40 stocks in my basket, drawn from eight S&P 500 sectors, twice as many were down from the open as up. Only a relative handful of stocks were leading the rally back toward the open.

How a trader utilized that information was completely discretionary. A trader may have used the information to fade the rally, to take profits, to hold off on a trade to the long side, to take the side of the financials, or to do nothing at all. Just as a spotter calls out the positions of cars to a race car driver, providing a clearer view of the track, the tweets call out relevant information to the trader. Over time, a trader develops a feel for which tweets are helpful and which are not to their particular style of trading.

In short, the goal is to augment a trader's trading, not interfere with his or her judgment. An analyst may recommend a stock, but it is up to a portfolio manager to include or not include that name in the portfolio, how much of the stock to acquire at given prices, etc. Similarly, a Twitter analyst may caution a trader about slow market conditions and reduced volatility, but it is the trader's ultimate responsibility to factor this information into trading.

Over time, I will be refining the tweets to make them more useful for real time decision making. Interested traders are encouraged to follow along; it's free of charge and involves no registration of personal data. And, of course, I'm always open to ideas and suggestions regarding the tweets. I can best serve as your eyes and ears if you let me know what is most useful for your trading. Thanks for the continued interest.