The Twitter Trading Strategy: Backtest and Performance Analysis

The proportion of adult Internet users who use social media platforms is approaching 75%, and this figure is growing. A good number of these social media users participate in the financial markets and use Twitter to disseminate their interest in the market. In this era of social investing/trading, Twitter can be a good place to get a sense of the sentiment in various financial markets. But what are Twitter trading strategies?

The Twitter trading strategy refers to the idea of using market sentiments on Twitter to aid trading decisions. Twitter provides a new meaningful channel for users to share information and their personal feelings, and as such, it can serve as a convenient medium to capture social sentiment in different financial markets at any point in time.

Emotional sentiment about a firm’s stock that spreads rapidly through social media is likely to be incorporated quickly into the stock’s price, whereas sentiment that spreads slowly takes longer to be incorporated into stock prices and may likely influence stock prices in the future.

In this post, we take a look at Twitter trading strategies. At the end of the article we provide you with a few backtested Twitter trading strategies (sentiment strategies).

What is Twitter

Twitter is a microblogging service that is currently free to use. However, to use the Twitter application or to browse the website located at Twitter.com, you must have either a smartphone or a computer with an internet connection. With this social networking service, people communicate with one another by sending brief messages known as tweets. Tweets can contain any combination of text, videos, photos, and connections to other websites or online content. However, any tweet must not contain more than 280 characters.

Twitter combines instant messaging and blogging by allowing registered users to post, share, like, and respond to others’ tweets with short messages. Users who have not registered for the service can only read tweets. People use Twitter to stay updated on brand news and promotions, communicate with friends, and follow influential people in business, politics, the latest news, trends, and entertainment. It’s also a great tool for marketing your products or ideas.

Twitter helps to speed up the dissemination of information. Because tweets can be sent to followers in real-time, inexperienced users may confuse them with instant messages (IM). Tweets, however, are published on the Twitter website instead of instant messages, which are lost when the user exits the application. They are open to the public, searchable, and permanent. There is also the option to password-protect tweets, making them only accessible to the user’s followers.

Individuals can control the content they see on Twitter by searching for topics and following other users and businesses. In most cases, the user’s timeline will reflect their choices; however, they may also see retweets from people they followed and promoted Tweets, which are paid advertisements.

Twitter determines which topics are trending by using an algorithm with its users’ preferences, locations, and interests. This algorithm analyzes current trends and draws attention to developing conversations and topics.

Twitter developmental milestones

Twitter was founded in March 2006 by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams. The application was born out of the need to use a brief message system in a more intimate setting. It was made available to the general public in July 2006.

Over the following few years, the number of people using Twitter skyrocketed, reaching a staggering 6 million by 2008. This figure more than tripled the following year to 18 million, and it did so again in 2010 (54.2 million). During this time, the number of “tweets” sent daily increased from less than one million to more than 45 million.

Twitter launched several new services in 2010 and 2011, including promoted accounts, a link-shortening service, and a music application. One of the most significant changes in 2017 was an increase in the maximum number of characters that can be used in a tweet from 140 to 280 characters.

It later created the verified account sign to reduce the number of fake accounts on the platform. This symbol denotes that the account is genuine and belongs to the person or entity in question. For an individual or company to receive the verification badge, Twitter verifies their identity. This helps people maintain their trust in the platform. To be verified by Twitter, the account must be linked to a well-known person or brand and meet the platform’s requirements, which include using an official website, ID, or email address.

The Twitter stock

Twitter filed paperwork to become publicly traded in September 2013, debuting on the New York Stock Exchange in November of that year (the ticker code was TWTR). It had its IPO on November 7, at $26 per share, but the stock opened at $45 per share. Subsequently, the stock was pretty much stagnant compared to other tech stocks.

Between 2014 and 2017, Twitter acquired several companies, including Periscope, a popular app for live video streaming. Despite all those, the stock did not really take off like other tech stocks. It reached an all-time high of $80.59 in February 2021, though. But that was the best it could do.

In April 2022, Elon Musk declared his intention to acquire Twitter. Before then, he was already the highest shareholder at 9.1% of the company’s shares. The deal to acquire Twitter at $54 per share would cost about $44 billion. Musk initially back out of the deal, but after months of going back and forth, Elon Musk completed the acquisition of the company on October 27, 2022, and took it private. Twitter stock (TWTR) was delisted from the New York Stock Exchange on November 8, 2022.

The growing importance of Twitter in financial trading

Social media platforms control the financial markets like they control many other industries, including politics, business, entertainment, and sports. Everything in today’s world is done through social media platforms, and participating in social media gives you many opportunities and the ability to get the most recent market updates and information.

Users have integrated social media sentiment into many aspects of their daily lives, including the financial decision-making process. Recent research has also revealed that emotional sentiment plays an important role in decision-making, particularly investment decisions. This contrasts with the common practice of basing decisions on rational information evaluation.

Traders can benefit greatly from the information they get from Twitter and can use it to determine various social trends in the financial markets. You can also use the information to find out whether or not there is considerable volatility in the trading markets.

Top Trading Hashtags on Twitter

Hashtags (“#”, as they are used on social media platforms) are used to make specific keywords, posts, and information about the content being shared easier to find. Content distributors include relevant hashtags in their postings to increase traffic, and consumers use hashtags to find what they are looking for easily.

Traders frequently use hashtags to find relevant market news, technical and fundamental analysis topics, trading recommendations, and market commentary, all of which help the trader gauge the social sentiment in the asset of interest.

For example, a trader interested in learning about Apple stock will type “AAPL” into the search field. That would help them easily find the most recurring discussions about the stock.

So, with that in mind, let’s explore the most trendy and important hashtags about trading on Twitter and other leading social media platforms.

General Trading Hashtags on Twitter

• #trading
• #trade
• #money
• #daytrader
• #wallstreet
• #goldprice
• #technicalanalysis
• #investing
• #investment
• #investor
• #trader
• #financialfreedom
• #finance
• #daytrading

Forex Trading Hashtags

Popular Hashtags for Forex Traders

• #forex
• #forextrading
• #forexsignals
• #forexanalysis
• #forextrader
• #forexmarket
• #fxmarket
• #eurusd/#gbpusd/#usdjpy, etc

Stock Market Popular Hashtags

Top Hashtags for Stock Traders

• #stocks
• #stockmarket
• #stockmarketnews
• #stockmarkettips
• #stockmarkets
• #thestockmarket
• #stockmarketinvesting
• $DIA
• $SPY
• $QQQ

Cryptocurrency Market Trending Hashtags

Top Hashtags for Crypto Traders

• #cryptocurrency
• #crypto
• #bitcoin
• #bitcoinnews
• #bitcointrading
• #binance
• #coinbase
• #bitcoins
• #cryptotrading
• #altcoins
• #nft
• #elonmusk
• #cryptocrash
• #btc/#eth/#xrp/#doge, etc

Best Hashtags on Twitter for Traders and Investors

If you want to grow your Twitter account as a trader, these are the most popular hashtags for traders on Twitter:

• #traders – 33%
• #trading – 12%
• #trader – 10%
• #forex – 9%
• #bitcoin – 6%
• #daytrader – 5%
• #trade – 5%
• #stockmarket – 5%
• #money – 5%
• #forextrader – 4%

Where can I buy Twitter stock?

Twitter stock (TWTR) was initially trading on the New York Stock Exchange — after it went public on November 7, 2013 — and could be bought through any online stockbroker. But following Elon Musk’s acquisition of the stock on October 27, 2022, and his intention to take the company private, the stock has been delisted from the NYSE. The stock was delisted on November 8, 2022, and can no longer be bought from the stock exchange.

However, even though you can no longer buy Twitter stock from the NYSE through your broker, you may still be able to buy stock directly from existing investors through the IOB (International Order Book — a secondary market owned by the London Stock Exchange where investors can buy private stocks directly from the owners). On the IOB, the Twitter stock is listed under the symbol “0QZB”.

To buy the stock from the IOB, you have to open a stock trading account with a brokerage that offers access to the IOB, as not many stockbrokers do. A good example is Interactive Brokers. You can open an account with Interactive Brokers, fund it, and then buy the stock from private investors willing to sell some of their shares.

Twitter trading strategy backtest

We know several traders that used (some still using) Twitter to generate trades. They make a script that measures the activity for certain hashtags, and buy and sell markets and stocks based on that. They use backtested ideas and strategies, of course. Personally, we have never tried it. Thus, we can’t offer or own personalized Twitter strategy backtest with proper trading rules.

Twitter trading sentiment strategies require a bit amount of coding knowledge. You can use Amibroker for it, but most likely Python code or some other language/platform is better.

We did a search on the internet to find any public or free Twitter strategy backtests. This is what we found:

Twitter sentiment strategy on Bitcoin

We came across an interesting academic study made by Konstantinos Tsoulias who wrote his MSc dissertation in mathematics about Bitcoin Trading Strategies Based On Twitter Sentiment Analysis. His main conclusion was that you can indeed make a good return with limited risk by using Twitter sentiment.

The correlation between tweets and price is “obvious”:

The chart above by Mr. Tsoulias shows that the higher the price, the more tweets (or is it the other way around?). Tsoulis made a script that separated Bitcoin tweets into positive or negative tweets and made strategies based on that.

The strategy employed was this: when the positive sentiment is above a rolling mean, then buy (and vice versa). The time frame used is both intraday and daily bars.

Here’s the equity curve of the daily time frame:

Here’s the equity curve of the intraday time frame:

However, we need to compare the buy-and-hold performance of Bitcoin:

As you can see, the Bitcoin Twitter sentiment strategy managed to beat buy and hold as it made you avoid most of the drawdown after the bubble in 2017.

Twitter sentiment strategy on stocks

Three German students made a dissertation called Separating the signal from the noise –
financial machine learning for Twitter. They covered all stocks in S&P 500 and looked at nine million tweets.

Their conclusion reads like this:

We find that the strategy based on a random forest clearly outperforms all benchmark models and yields statistically and economically significant annual returns of 6.4 percent and a Sharpe ratio close to 2.2 after taking into account transaction costs, leverage constraints and single-stock position limits…..we have successfully demonstrated that our design is able to extract predictive information from tweets that can be translated to statistically and economically significant excess returns.

Matthias Schnaubelt, Thomas Fischer, and Christopher Krauss

Twitter sentiment trading strategy S&P 500

Let’s look at the third and last study. We found an interesting study at devexperts dot com titled How to Create and Backtest Trading Strategy on Twitter Sentiments. They hand-picked a number of profiles on Twitter to follow and used the number of tweets on the ticker SPY (SPY ETF trading). Based on this, they created a daily sentiment every day.

They made a chart that summarizes the result of their backtest:

The strategy outperformed, but keep in mind that this is over a very short period of time.

The article comes with a great deal of code and you most probably find it very useful if you want to delve further into backtesting Twitter strategies.

Amibroker code

We don’t do Python code – we prefer Amibroker (read our Amibroker review).

Since we started our blog in 2012, we have written over 700 free articles. Many of the articles come with quantified trading rules that can be backtested and turned into trading strategies. Here is a list of our free trading strategies.

We offer the code and logic in plain English for about 150 of those trading ideas. Read more here:

Twitter trading strategies – conclusion

Twitter is a useful tool for traders and investors and you might turn into a very good sentiment indicator if you are good at coding, at least the research we have come across indicate that. However, you must be able to code or outsource coding to someone else. The latter comes with some additional risk when you need to adjust the code when an inevitable change in the Twitter API happens.

Related Reading: 10 Trading Strategies on Twitter

FAQ:

When was Twitter founded, and how has it evolved over the years?

Twitter is a microblogging service that allows users to communicate with each other through brief messages called tweets. Twitter was founded in March 2006 by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams. Since its launch, Twitter has undergone several developmental milestones, including changes in character limits, the introduction of new services, and adjustments to its algorithm.

What is the significance of Twitter in financial trading?

Twitter has become a crucial platform for information dissemination in financial trading. Traders use the platform to stay updated on market news, trends, and sentiments. The social media sentiment on Twitter is often integrated into financial decision-making processes, providing insights into market dynamics.

Can I still buy Twitter stock, and where can I buy it?

Following Elon Musk’s acquisition, Twitter stock (TWTR) has been delisted from the New York Stock Exchange. However, it may still be possible to buy Twitter stock directly from existing investors through the International Order Book (IOB). Investors can use brokers like Interactive Brokers to access the IOB. Traders can integrate Twitter into their strategies by analyzing sentiment and trending hashtags. Backtested strategies based on Twitter sentiment have been explored in academic studies and may involve measuring sentiment around specific stocks or assets.