How to use the 'Volfefe Index', which tracks the impact of Trump's tweets for trading
Love him or loathe him, President Trump moves markets.
President Trump is a prolific twitter user. Some even reported that one of his work phones contains only one app: Twitter.
By some tallies, Donald Trump has tweeted more than 10,000 messages since his presidency began. His 64 million followers on Twitter received multiple updates per day from @realDonaldTrump.
Just recently, JP Morgan published a 'Volfefe Index' to study how the president's tweet impact interest rate markets. 'Volfefe' is a combination of volatility and 'covfefe' - a mysterious word posted by the President on May 31, 2017 on Twitter.
In that study, analysts first examined President Twitter messages with natural language methods. By breaking sentences into words, what they found was that trade-related words like 'China', 'Product', 'Billion' and 'Tariffs' have a growing impact on markets over time. Presumably this is due to the increased urgency of the Sino-US trade war.
They concluded that many Trump tweets had direct - and immediate - impact on rates' volatility, especially when these tweets are related to trade or monetary policy. By constructing a 'Twitter-vol' index using market-moving words (restricted to top 75 words), the study quantifies the impact of Trump tweets into market observables. The result is this:
Conclusion: It pays to follow Trump's tweets.
Using Twitter Messages To Predict Stock Markets?
JP Morgan's 'Volfefe Index', idea is not a new one. In fact, researchers have been testing on this idea for years, ie, using Twitter as a proxy for market and public sentiment and its predictability on markets.
As early as 2010, Bollen et al from Indiana University used 9 million+ Twitter feeds as a proxy for public mood. They tested changes in these messages against the subsequent movements in DJIA and found some association. It was the first time that a connection was scientifically made between Twitter massages and market movements.
Later, two Stanford researchers also affirmed Bollen's study when they use Twitter feeds to predict DJIA. Their study used neural network. Since then, many other studies have been published.
These results caught the eye of some practitioners. Derwent Capital Markets, in 2010, was launched with this concept. Their edge was to employ Twitter feeds as the raw material. After some statistical analyses, these results are used to bet on market movements.
But their efforts did not translate into marketing and financial success.Why? Presumably, I suspect the Twitter space is far too noisy.
Remember, Twitter is a crowd-sourced messaging service. Some messages are genuine; some are not (fake news, they call it). Segregating them is hard work. Even then, with all the results the 'edge' may be too small to earn above-market returns in reality. Friction costs money.
How To Use Twitter Effectively For Trading
As of March 21, 2019 this year, Twitter has officially became a teenager. A mature social media platform used by millions. It has become a go-to place for many investors, traders, and financiers. Financial twitter is now a very active place for all sorts of market banters. You can benefit from using the platform too. Here are some tips to use them effectively for forex speculation, financial spread betting and CFD trading:
- Follow selectively. Some CEOs and heavy hitters actively use Twitter to promote their views and products. Some don't. For example, you can learn a lot from Mohamed El Elrian and Ray Dalio's tweets. But not Warren Buffet. As of 2019, the third richest man in the world had a grand total of 9 tweets - but 1.5 million followers.
- Use Twitter for stock research - Check out if the CEO of a listed firm has a habit of posting disruptive tweets. Some do - like Elon Musk of Tesla inc (TSLA). If you own this stock, following Musk's tweet is almost essential. Also, Twitter space can produced heated arguments, say, between bullish and bearish camp of Tesla. You can listen to both sides for your portfolio.
- Subscribe to news feed. These feeds may give you some market-moving ideas:
- Use data mining tools. Twitter is a voluminous source of info. These tools can help you analyse and aggregate the impact of tweets, summarise collective information, and backtest some ideas. Some useful tools include:
- Interact and network. If you interact more, you may get more ideas.
Lastly, I attach Fintwit's Fantastic List of twitter accounts (webpage here) to get you started:
FinTwit List (work in progress)