March 9, 2012:
"I have been observing StockTwits and Twitter as it relates to trading for about a year and a half now and I would like to relay some of my observations, perhaps very obvious to some. I think it is crucial to first off describe the differences of investing vs. trading vs. gambling. The investor is someone who typically seeks out an edge through value with a longer time frame. An investor might invest in diversified ETFs or mutual funds and such stocks as BAC, JPM, GE, XOM, and PG. The trader is someone who typically seeks out an edge through growth with a shorter time frame (note that the goal of many traders is to be in a strong growth stock for a longer time frame as huge gains can be made, but in general the time frame is shorter). A trader might trade such stocks as AAPL, ALXN, PCLN, MA, and SBUX. A gambler is someone who has no edge who relies on luck in the short-term while in a longer time frame will always lose money. Though some believe that investing is a more of a gamble, like Jesse Livermore who states that investors “make a bet, stay with it, and if it goes wrong, they lose it all,” I believe investing has its place, such as investing in diversified low-cost ETFs in retirement accounts which require peace of mind and inherent longer time frames. Clearly it is possible to trade in one account and invest in another (and even gamble in a third!). Regardless, a trade that is made without an edge (such as beyond a pivot point or clear breakout on poor quality stocks or even top quality stocks in a poor acting market or without increased volume) is a gamble. I believe this unique commitment and patience required for succesful trading makes investing better for 90% of individuals.
So how does this apply to StockTwits and Twitter? What I have observed are naive users who seek out tips on these services (and even CNBC which routinely features unaccountables who provide advice with no indication of their own strategy) on when to buy and sell stocks not knowing the other user’s time frame, risk tolerance, entry point, sell rules, goals, overall strategy etc. It seems that these lemmings desire some sort of human confirmation before acting. These users who are clearly blindly following others and high-flying extended stocks show up in droves in an uptrend but disappear when the overall market changes, probably along with their portfolio. These users do not understand the behavior of the stocks they are entering and do not have their own clear strategy. A study of INVN on StockTwits is a fascinating study as many users were clearly following others who were making purchases on a pure guess that a low was set and then selling at a lose as it fell through its 50-day moving average. The fact that these users sold reveals that they are traders, albeit gambling traders. A simple study of INVN’s volume showed a purchase at this second bounce from the 50-day moving average lacked any sort of trader’s edge and therefore was and still remains a gamble for the trader. It remains debatable on whether INVN currently has an investor’s edge.
Long story short, obviously someone who partakes in the market must clearly understand their own strategy (write it down!). My suggestion for those who use StockTwits and Twitter for market purposes is to seek out other user’s who clearly have the same methodology and ignore the lemmings. It is the investor or trader who avoids gambling by remaining true to a strategy, whether that is the methodology of Livermore, Darvis, or O’Neil or not, that is most succesful."
