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Exploring social sentiment as a trading signal

indicator
Aaron undefined
6:41 PM Mar 09 2022 (Wed) Newsletter

Image credit: Freepik

Key takeaways

Social sentiment score analyzes aggregated social media data to help users
understand how underlying instruments (stocks or crypto) are performing in the eyes
of the public.
Social sentiment score serves as a proxy to gauge the relative valuation of an
instrument compared to normal social sentiment level, giving an indication of whether
the social sentiment is over-priced or over-underpriced.
This gives users an idea of how a publicly-traded instrument's price might perform.

How Social Sentiment Score could be used to facilitate investment decisions

Social sentiment scores are compiled from information users post publicly to Twitter and
Stocktwits. If the social sentiment score exceeds or falls below normal sentiment score
lam.yi.long Platform
levels, corresponding price correction may take place in the next 6-12 hours
Logoutin which prices
converges to price levels to address any over or undervaluations due to excessive levels of
sentiment.
From observations, trading signals tend to manifest when:

Social sentiment level is above normal sentiment distribution (i.e. Over-optimistic) =>
Price drops in the next 6-12 hours
Social sentiment level is below normal sentiment distribution (i.e. Over-pessimistic) =>
Price increases in the next 6-12 hours

Based on these, excessive sentiment can be divided into positive and warning signals with
varing magnitudes depending on their direction and degree of deviation from the normal
sentiment distribution.
Below is a demonstration of how this could work to generate trading signals.

Limitations of Social Sentiment Score Model

As illustrated, there can be lagging and diminishing effects using the social sentiment
score model to gauge stock price changes before and after weekends or holidays (non-
trading hours), since stock markets operate in trading hours only, whilst social
sentiment is around 24-7;
Succeeding over-optimistic or over pessimistic social sentiment levels may have
unexpected price change from our usual observations, with varying magnitudes of
decrement or increment; and
Succeeding over-optimistic and over-pessimistic social sentiment levels may reduce
the corresponding magnitudes of corresponding price corrections in the following
periods.
Nevertheless, social sentiment score, to a certain extent, can be used as a reliable leading
indicator measurable to provide hints as to where the price trend will head next, and this
lam.yi.long Platform
could provide investors with some indicators to guide their investmentLogout
strategies as they
anticipate future market conditions

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