Lessons from the Pros

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You May Not “Like” Social Media, But You Have to Deal With it As a Trader

In July 2012, Netflix CEO Reed Hastings announced that his company had delivered over 1 billion hours of streaming video in a singe month for the first time ever. The statement sent the stock higher. It also raised eyebrows at the Securities and Exchange Commission (SEC) because the announcement was made not in a press release or analyst call—but on Twitter.

After some soul searching, the SEC decided Hastings’ tweet did not violate rules against selectively disclosing information. A report explained, “We appreciate the value and prevalence of social media channels in contemporary market communications, and the commission supports companies seeking new ways to communicate.”

The SEC was acknowledging a situation that has been in existence for some time: social media is influencing trading on Wall Street just as it is impacting every other aspect of our lives. A good example is the “Fake AP tweet” on April 23, 2013 that caused the markets to plummet, then recover almost immediately, on news that an explosion had occurred in the White House and President Obama had been injured.

A New York analytics firm, Dataminr, was one of the first to alert clients about a potential crisis when its algorithm discovered a tweet that combined the words “White House” and “Explosion.”  Of course, that tweet turned out to be false; a fake AP Twitter ID had been established by the Syrian Electronic Army, a self-described “group of enthusiastic Syrian youth.” Dataminr’s algorithm quickly identified the tweet as suspicious based on a lack of corroboration; unlike the very real tragedy in Boston earlier in that week, in D.C. there was no sudden increase in panicked tweets from people located near the White House.


But meanwhile the DJIA had plunged some 145 points and the market lost some $200 billion in value as automated trading programs kicked into effect. It may be that fairly few trades were executed as buyers dropped their bids and no sellers were available to match them, and the market recovered its losses within minutes. Yet according to Commodities Future Trading Commission member Bart Chilton, “Somebody lost money, and not everybody who got out got back in.”

So what does all this mean to you as a trader following the rules-based strategy taught at Online Trading Academy? If you’re closely following those rules you’re probably okay. Most of our entries require price to enter a zone but then either establish itself in that zone or retrace the entry point; if price continued plummeting (or shooting upward) we would not have a trade. If you owned a position on April 24 and had a protective stop on the way down and it got filled you may have lost, but that’s a misfortune similar to being hit by lightning. You can’t predict it or prepare for it.

For savvy traders, social media will become one more market indicator you’ll watch as part of a broader trading plan. The basics still hold true: when there is an imbalance of willing buyers and willing sellers price is about to change direction, often dramatically. And not even the Syrian Electronic Army can change that.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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