How to beat forex market? Just get on Twitter
london — Traders need look no further than their Twitter feeds to gain an edge in currency markets, according to a new study by a pair of academics.
Buying and selling the euro based on predictions tweeted by currency watchers would give you risk-adjusted returns almost four times bigger than standard carry-trade strategies, Vahid Gholampour and Eric van Wincoop found in a paper published last month.
The odds of beating the market are best if you track Twitter users who have at least 500 followers, dubbed “informed agents” in the research because many of them work as brokers, analysts and financial commentators. The findings add to a growing body of literature suggesting market-moving information is circulated on social media before it’s fully reflected in asset prices.
“The level of performance definitely surprised me,” said van Wincoop, a former economist at the New York Federal Reserve, and Gholampour’s PhD supervisor for the three-year study at the University of Virginia.
“It confirms the idea that Twitter is a good source of private information.” While Twitter has 313 million active monthly users offering 140-character opinions on everything from election outcomes to sports results, currency predictions tend to be shared by people with skin in the game who care about their credibility, which may explain the wisdom of listening to what they have to say.
Consistent returns
Many have cultivated captive audiences. The musings of London-based foreign-exchange trader @trader — dante pop up on the feeds of 23,600 users, while the handle @50Pips, which tweets about its market calls and provides technical analysis daily, has almost 65,000 followers.
Collecting data from October 2013 to March 2016, Gholampour and van Wincoop identified 27,557 tweets that contained a forecast on whether the euro would rise, fall or stay the same against the greenback. They then tested the accuracy of the guesses by devising a model to calculate the risk-adjusted returns available to investors if they’d followed the tweeters’ advice.
The academics found that making trades based on the sentiment of “informed agents” generated a Sharpe ratio — a widely used measure of returns per unit of risk — of 1.68. That compares with an annualized 0.44 for the long-term carry-trade strategy, which involves selling a currency with a low interest rate and using the funds to purchase a higher-yielding currency. — Bloomberg