Rise of Social Trading

[andrewstevens]

One way to look at financial markets is in terms of voting, more buyers, market goes up, more sellers market goes down.

Do you think by asking a large number of traders if they would buy or sell an asset at its current price would be a way to approximate global market sentiment?

What if you asked a large group of traders to which price level do you think an asset will reach next, wouldn't this information give you a better view of market sentiment and provide you with a statistical edge (law of large numbers).

I'm a computer scientist and part time trader and am interested in your feedback on a beta service structured like a managed fund setup to let traders trade together.

http://hivetrading.com/HiveTrading/t...ss/trading.php

This is not intended as advertising I'm interested in your feedback, please let me know your thoughts on this trading service and what problems/benefits you can see?

 

[AJStanbridge]

One way to look at financial markets is in terms of voting, more buyers, market goes up, more sellers market goes down.

Do you think by asking a large number of traders if they would buy or sell an asset at its current price would be a way to approximate global market sentiment?

What if you asked a large group of traders to which price level do you think an asset will reach next, wouldn't this information give you a better view of market sentiment and provide you with a statistical edge (law of large numbers).

I'm a computer scientist and part time trader and am interested in your feedback on a beta service structured like a managed fund setup to let traders trade together.

http://hivetrading.com/HiveTrading/t...ss/trading.php

This is not intended as advertising I'm interested in your feedback, please let me know your thoughts on this trading service and what problems/benefits you can see?

You’d need to ensure your set of traders were the ones who knew. And those that know, don’t say. Those that say, don’t know. The majority are largely and necessarily uninformed and would not provide you with sufficient certainty upon which to base any call. They are never always completely wrong either so fading them on principle would be equally pointless.

You do have the price itself and of course volume which provide the dynamic current consensus of all traders. They’re not going to give you any indications of future development regardless of the hopelessly out of date hype around tape reading, but it’s still the best combo you have to work with.

 

[andrewstevens]

What if everyone read economic news surrounding a currency and made a judgement about the future exchange rate movement of a currency pair. If a large number of individuals did this and updated their market sentiment (their next believed price level the series will reach), would this not form an approximation to the entire market sentiment.

Could you not use this information to gain a statistical advantage on the market by knowing more about global market sentiment and how individual investors (or large institutional investors) are likely to respond to economic information?

 

[andrewstevens]

You’d need to ensure your set of traders were the ones who knew. And those that know, don’t say. Those that say, don’t know. The majority are largely and necessarily uninformed and would not provide you with sufficient certainty upon which to base any call. They are never always completely wrong either so fading them on principle would be equally pointless.

You do have the price itself and of course volume which provide the dynamic current consensus of all traders. They’re not going to give you any indications of future development regardless of the hopelessly out of date hype around tape reading, but it’s still the best combo you have to work with.

Thanks for your feedback, I agree, but as you point out the vast majority of individuals 90%+ would not provide any useful information regarding market direction. Maybe only 10% can read the news and have some genuine incites into the market.

If so the other 90% (representing a large sample) of uniformed traders provided there market direction this would have an expected direction of zero (same number vote up as down). The other 10% would add a statistical bias aligned with smart money (institutional investors) that are most likely to move the markets. This concept would still hold up for a large sample of traders both informed and uniformed, even if number of uniformed traders most likely overwhelm informed traders it would not impact the sentiment of smart money?

 

[AJStanbridge]

What if everyone read economic news surrounding a currency and made a judgement about the future exchange rate movement of a currency pair. If a large number of individuals did this and updated their market sentiment (their next believed price level the series will reach), would this not form an approximation to the entire market sentiment.

This is what already happens, they place trades according to their sentiment and this results in price development, or lack thereof.

Could you not use this information to gain a statistical advantage on the market by knowing more about global market sentiment and how individual investors (or large institutional investors) are likely to respond to economic information?

It's already priced in. You're never going to know more about global market sentiment than those who actually create, control and manipulate that sentiment.

I understand your objectives and social media lends itself to number crunching (sentiment crunching?) activities of the type you propose, but ultimately, it's the quality of the information and the quality of the analysis that counts, not the quantity. You're a computer tech so you'll be all too aware of this acronym - GIGO?

 

[gerryg]

What if everyone read economic news surrounding a currency and made a judgement about the future exchange rate movement of a currency pair. If a large number of individuals did this and updated their market sentiment (their next believed price level the series will reach), would this not form an approximation to the entire market sentiment.

Could you not use this information to gain a statistical advantage on the market by knowing more about global market sentiment and how individual investors (or large institutional investors) are likely to respond to economic information?

Are you talking about market rigging? If not, then you put this idea as a consecutive objective of your website .. Otherwise I don't see any way in how that aggregation of traders will pursue their own interests in sharing their sentiments or follow some generally set action (buying or selling asset)

Basically it is possible to manipulate some small market - stock, low-liquid currency pair etc. by prior conspiracy... but the more the stock the more traders should participate simultaneously to make significant shifts in price..

If you are talking about showing traders sentiments within a website, then it is not a brand new invention, for example my broker Нotforex and other brokers show buy/sell sentiments within a brokerage and it has almost no benefit for your trading..

 

[drtro]

Herd mentality actually loses people money. Unless your votes are full of professionals, I wouldn't take it seriously.

 

[Forexmospherian]

I have a job to believe in this theory of herd mentality in trading

For example - you could have in Forex trading 70% of all retail traders - somewhere between say half a million and a million ( nobody really knows these numbers due to unregulated brokers and traders in countries trading were they should not be trading from ) who all agree a currency pair should fall in price during the next say session or 12 hrs.

Then I Large Bank - 2 hedge funds - ie in theory - 3 buy against say 500,000 sellers - and still out trump them.

Its only the money stakes that count - not the herd of people

Likewise 50,000 retail traders could all say buy ( all traders with less than $10k accounts) and then 5000 of the largest retail traders ( with accounts between $50k and $150k) all sell heavily - and yet again the herd of masses get out trumped.

So for me herd mentality is just another myth of theory or deceit put out be the trade trying to keep trading simple to attract the masses.

Trading is far from simple or easy

Its a complex web of deceit and trickery - needing sophisticated methods and skills to have any chance long term of winning - or even staying in the game - never mind beating super computers.

Only my opinion - but think about it - and then all the facts become clearer

F

 

[drtro]

I have a job to believe in this theory of herd mentality in trading

For example - you could have in Forex trading 70% of all retail traders - somewhere between say half a million and a million ( nobody really knows these numbers due to unregulated brokers and traders in countries trading were they should not be trading from ) who all agree a currency pair should fall in price during the next say session or 12 hrs.

Then I Large Bank - 2 hedge funds - ie in theory - 3 buy against say 500,000 sellers - and still out trump them.

Its only the money stakes that count - not the herd of people

Likewise 50,000 retail traders could all say buy ( all traders with less than $10k accounts) and then 5000 of the largest retail traders ( with accounts between $50k and $150k) all sell heavily - and yet again the herd of masses get out trumped.

So for me herd mentality is just another myth of theory or deceit put out be the trade trying to keep trading simple to attract the masses.

Trading is far from simple or easy

Its a complex web of deceit and trickery - needing sophisticated methods and skills to have any chance long term of winning - or even staying in the game - never mind beating super computers.

Only my opinion - but think about it - and then all the facts become clearer

F

That's why ignorance is bliss and you should only consume information as it comes in, not speculate or predict. If Citi Bank is buying 1M shares of XYZ and gave it an upgrade, it's going to go up, regardless of what your Skype group feels or thinks about it.

 

[Big_P]

Andrew,

I had a similar idea a while ago and tried an experiment on this forum :

http://www.trade2win.com/boards/general-trading-chat/132984-wisdom-crowds-experiment.html

I asked people on a Monday morning to guess the close of the FTSE on Friday. First time round, the first week I did it, the result was only 4 points out ...

Would have been a very interesting thread, but people lost interest.

 

[VeerTrade]

It is the Institutions who move the market hence why I believe social trading is not a reliable source.

It is not a case of the amount of buyers or sellers it is the volume which is significant. A single bank can trade a huge amount of volume.

I believe you are better off spending your time reading the Commitment of Traders report.

 

[Solas0077]

Social trading is noise trading

 

[globalarbtrader]

It's the old 'wisdom of crowds' versus 'herding behaviour' problem.

You only get the wisdom of crowds under certain conditions. If you get groupthink, as with analysts estimates of earnings, then its no good. Incentives need to be right, and it helps if people don't see others guesses.

Quite a few hedge funds (Marshall Wace was the first I think) run a system (alpha capture) where they get analysts to tell them what they really like, not what they're publically saying, then reward them with the right incentive if they perform.

Note these are people with better information than average, not just informed punters.

An interesting wrinkle is you need to correct for the bias that's still present in these forecasts. So most of the analysts were rubbish at predicting shorts. To correct; just use the longs and then hedge with the market.

Betting markets are good at predicting things like the outcomes of elections and sporting events, because the incentives are right. But predicting market prices, well you do that when you trade, so the herds prediction will always come true. With a higher weighting on those with the most money, as others have inferred.

Personally I think this stuff is good for stock selection, but I'd be wary of using it for predicting market direction.

 

[Solas0077]

Personally I think this stuff is good for stock selection, but I'd be wary of using it for predicting market direction.

Excellent point! + to you.