5 Reasons to Use Social Media Sentiment Data for Your Trading Analysis

In the last few years, Social Media (SM) sentiment data as applied to trading analysis and forecasts has grown from an experimental gimmick to an established field. Yet, many traders and fund managers are uncertain about its use in trading analysis. In this article, we set out to address this issue and show you the five key reasons why SM sentiment is a true game changer for traders and analysts.

Arrival of a new age in trading – Social Media sentiment analysis

For stock market, crypto, and commodity traders, SM sentiment is not merely a “useful tool” to enhance their decision-making. SM sentiment data represents a new major revolutionary stage in how the major financial markets are analysed, forecast, and profited from.

The history of modern stock exchanges stretches as far back as 1611, when the world’s first stock exchange, the Amsterdam Stock Exchange, was founded. This signified the first revolution in the world of modern trading. Over the next few centuries, exchanges flourished, becoming the backbone of trading in various financial assets.

The 1970s saw the second revolutionary stage with the arrival of electronic exchanges and algorithmic trading. The third major stage occurred around two decades ago, when fully automated trading methodologies started to gain traction.

The fourth trading revolution has been building up for the last several years. For the first time in the history of trading, alternative data sources, particularly SM sentiment data, are being used to enhance and guide trading decisions. We are now in the midst of this revolutionary buildup, where SM sentiment has become critical not simply to get ahead but also, importantly, not to fall behind others using it for their trading analysis.

The key reasons why you should use Social Media sentiment in your trading

SM sentiment has grown massively popular as a key part of trading and investment decisions, and this popularity growth has not appeared out of thin air. Here are the five key reasons why SM sentiment data has become a cornerstone of trading and investment analysis. Incidentally, these are the key reasons why YOU should adopt SM sentiment analysis for your trading:

Reason 1 - Research studies have found that Social Media sentiment has an effect on trading prices, particularly for short-term (e.g., same day or next day) trading sessions.

If there is a reason to consider SM sentiment analysis very seriously, this is the one. Researchers in the past have found that SM sentiment does possess a predictive power, particularly for immediate or short-term time intervals. The exact methodology of these studies has varied, with different SM platforms investigated, different data collection approaches used, and different criteria for analysis (e.g., using only influencers with X subscribers/followers or using all SM users). However, enough extant knowledge exists to confidently say that SM sentiment does affect prices.

Reason 2 – the Social Media user base has exploded, making it hard to ignore this new “consumer universe” in financial markets.

By January 2023, the combined number of users on SM platforms has reached 4.76 billion, or nearly 60% of the world’s population.With more than half of all humans on SM, these users and their opinion collectively are bound to have a major impact on most financial markets. In fact, the popularity, and price swings too, of some crypto coins or stocks are often driven by SM sentiment. Yes, Mr. Musk, we are referring to your brands and the canine family cryptocurrencies you have turbocharged via tweeting.

Reason 3 – Social Media sentiment analysis tools have grown increasingly sophisticated.

Let’s make it clear - in 2023, any form of serious SM sentiment analysis is virtually impossible without the use of dedicated tools and platforms. The days when you could simply browse through Twitter and Reddit to see what the online folk are discussing in relation to some asset are well and truly over. To carry out effective SM sentiment analysis, you would use a dedicated analytical tool. These tools have grown quite sophisticated and are now capable of dissecting the online sentiment into positive/bullish, negative/bearish, and neutral. Some tools, and certainly PUMP amongst them, are capable of dissecting the sentiment into human-generated vs bot-generated.

This sophistication and richness of sentiment calibration have made some SM sentiment platforms an outstanding tool to drive your trading and investment decisions.

Reason 4 – Social Media sentiment is great for fundamental analysis.

Some technical analysts are known to be overly consumed with one key data piece – the asset’s price chart and its movements. However, the best analysts and traders always combine this critical data piece with quality fundamental analysis. The key premise of fundamental analysis is to sense anything that is not directly price-linked. As such, SM sentiment is among the most valuable data for a well-executed fundamental analysis exercise.

We would even argue that SM sentiment is no longer a classic “alternative data” indicator but rather a major fundamental analysis data piece, along with industry reports, tracking of the company’s management changes, or observing the key political developments.

Reason 5 – Social Media sentiment analysis opens up opportunities for traders due to its relative novelty.

You can’t get ahead in a competitive environment if it has grown too “efficient”. Traders and investors all know about the arduous task of trying to compete in efficient markets. The modern sources of trading data are available to all and sundry. In this environment, access to trading data has become so efficient and pervasive that you are unlikely to get significantly ahead simply by having access to this data.

Things are (still!) quite different in the world of SM sentiment analysis. Not every market participant has access to a SM sentiment analytics tool, and even fewer have access to a truly high-quality tool that measures the sentiment well. This “informational imbalance” creates a less efficient market with regard to access to quality SM sentiment data.

By using a good-quality SM analytics platform, you can get ahead in the world of trading, by being on the right side of this informational imbalance!