The Dangers of Trading on Social Media Information

By: Wayne Duggan

Social media has opened up a new world of opportunity for today’s traders. Market news and information that used to take days or even weeks to reach the public now spreads like wildfire on Twitter and Reddit in a matter of minutes.

However, despite the benefits that social media provides for active traders, market-centric social media can also create a cesspool of misinformation, market manipulation and confirmation bias. Traders relying on social media for their market news need to be very careful.

Use Trusted Sources
Thanks to social media, traders no longer have to rely on a handful of major media outlets to get their stock market news. But when it comes to news sources, more doesn’t always mean better.

In a worst-case scenario, so-called stock market “news” stories spreading on social media can be a deliberate attempt to manipulate the market. A nefarious actor can create a seemingly legitimate online news story and spread that story around to move a stock price in an attempt to personally profit.

But even if an unreliable news source intends to be accurate, sources from outside Wall Street are often misguided and reach the wrong conclusions. Finance can be extremely convoluted and difficult to understand. Without an intimate knowledge of what’s going on in the market and why, social media posters can easily misinterpret data or information.

Be Skeptical of Anonymous Posts
Just because a social media post comes from an anonymous account doesn’t mean its claims are invalid. Without knowing a poster’s identity, however, you can’t know that poster’s motivations and intentions. An anonymous poster may use solid, verifiable sources to back up an argument, but you still can’t necessarily trust the conclusions drawn from those sources.

A convincing, intelligent, detailed trading idea or news story might suggest the source is a legitimate Wall Street insider or trading expert. But it may also simply suggest that person is a successful con artist or pump-and-dump schemer.

Mainstream media outlets aren’t the only reliable sources. Verified independent financial news journalists, fund managers, analysts or professional traders can also be great sources. But make sure to confirm that they are who they say they are.

Avoid Confirmation Bias
One of the biggest dangers of social media trading is confirmation bias. Whether you are trading Apple (NASDAQ: AAPL) or AMC Entertainment (NASDAQ: AMC), there are thousands of people on social media that are taking the same side of the trade you are at any given time. By collecting news and ideas only from people who already agree with you, you are essentially creating a social media bubble of information that has little connection to the real world.

Verify information that supports your thesis. Investigate information that contradicts it. If you truly believe in a trading idea, you should be seeking out people taking the opposite side of the trade and testing your idea against their arguments. If the idea has merit in the first place, it should hold up to scrutiny.

Disclosure: The author holds no positions in the securities mentioned.

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Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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