Wednesday, December 22, 2010

Using Twitter to Predict the Stock Market

Yes, we do this in our Fund.  And we sell this data to quants at

My inbox has been filling up with articles about using Twitter moods to predict the stock market and this New York Times overview.  This strategy is effective for trading.  We know because we've been using these techniques in our own Fund:

Most revolutionary is that we can predict collective human behavior by monitoring conversations and expressions.  That's ground-breaking in itself and speaks to a forthcoming transformation of economic forecasting.  We've already seen psychologists and behavioral economists advising economic policy makers.

The applications of this go much beyond stock market forecasting. You can also predict consumer behavior - shopping and spending and risk-taking in general. And of interest to corporations, you can use mood data to predict what types of products comsumers are willing to buy (and thus what they should display).

For our fund we scan text data including news media, social media (chat rooms, blogs, and twitter), SEC filings, and executive commentary (interviews and earnings conference calls).  In all we track 240 psychological variables in various forms of granularity.  We've got data back to 1997 for social media, and we've been trading these strategies since we launched our Fund (the MarketPsy Long-Short Fund LP) on September 2, 2008.  And we have a great track record with low volatility.

Lest you doubt that this works, consider a more familiar scenario:  You had a bad day at work.  When you get home, everyone there seems so inappropriately upbeat.  So you maybe sulk a little, slam a door, say something rude.  You're acting out your unconscious emotions, and by definition you don't even know it.  How you were feeling - your irritation at work - changed your behavior.  And in the markets, little bits of news and information change collective behavior all the time.  My book Inside the Investor's Brain discusses this phenomenon in detail, and more for the layperson is our book MarketPsych:  How to Mange Fear and Build You Investor Identity.

We've got more information about our Fund available to accredited investors.   Also please see our charting service at

Best wishes,
Richard L Peterson MD
richardpeterson - AT -

No comments: