By David Shayer, CEO of Vantage FX UK
The two core ingredients of successful trading are knowledge and timing. The better informed you are, the better your ability to make smart investments before the market catches up. So, what happens when the way information disseminates goes through a paradigm shift?
Welcome to trading in the age of social media.
You don’t have to look further than this year’s explosive Gamestop saga to
In many respects, social media is beneficial to traders. It’s a fantastic tool to get very fast information and can provide a level of education that wasn’t previously available. In that way, it’s opened trading to lots of people, which can only be a good thing.
However, the fracturing of information comes with complications. Whether new to a particular channel or new to trading altogether, there’s a risk of falling into the traps of social media. The problem now is to make sure people are tapping into these platforms in the right way, for which there are three key things to bear in mind.
Tip one: Find out how to make use of sources
Where once people could rely on newspapers or company reports for trading information, people now have the endless expanse of the internet to consider. News and advice are available on
No trader should rely on traditional publications exclusively. The world has moved on. However, nor should they depend exclusively on social media and make trades based on a single Tweet. Traders must gather
On top of using a variety of sources, it’s vital to keep an eye on things like international politics, natural disasters, or social trends. Having that wider perspective can really help predict potential risks and opportunities that aren’t yet on TikTok.
Tip two: Take everything with a pinch of salt
These days news often breaks on social media ahead of most publications. While good for spreading information, that can include fake news. Inaccurate stories and rumours can spread like wildfire.
Social media platforms are not beholden to the same rules as traditional media outlets and posts are
Beyond fake news, anyone can start up a channel and post trading advice, for which there’s plenty of demand. The pandemic has seen a sudden rise in the popularity of financial influencers who post tips on the likes of TikTok. However, the
Traders must question the credibility of information and cross-reference news or tips carefully (using those other sources). Granted, you can’t be totally risk averse. Fact checking everything would be too time consuming and you’ll miss the opportunity for profit. There’s a balance to be struck, for which the key is to not be too reactive. Have a strategy in place and stick to it as best you can.
Tip three: Don’t jump on the bandwagon
Social media has also made markets harder to predict. The rules that have long governed trading no longer apply in the same way. Investors flock to so called meme stocks – whereby social media hype inflates the price of an asset for the wrong reasons. While some of these are coordinated attacks against hedge funds, it shows how social media contributes to inflating the price of popular stocks and ETFs.
Just look at how Elon Musk can send the price of DogeCoin soaring or sinking with a single tweet. Even the most experienced of traders can’t predict these movements, which has led some banks to develop technology for scraping and analysing social media to gain insight into where market sentiment – and therefore money – is heading.
This hype makes it easy for retail traders to get sucked into a bad trade. But if you’re hearing about an ETF that has performed very well, you might have already missed the boat. Best to err on the side of caution. Most importantly though, people must take an independent viewpoint and scrutinise the details to weigh up whether there’s a reliable opportunity for profit.
Giving you an edge
Many traders are still finding their feet in this ever-evolving situation, but social media is only likely to become more influential. TikTok was downloaded 850 million times in 2020. Some may be cautious about starting to use these platforms while some may see it as unnecessary altogether, which is not the case.
A combination of improved trading
That’s why traders must familiarise themselves with these new sources and learn how to use them to their advantage. The value of having the right information at the right time cannot be overstated.