Can Twitter be Used as a Forex Trading Indicator?

I was talking to one of my friends who trades stocks and he mentioned that he watches the stocks that he is trading on Twitter to see what people are saying about those stocks.  Then he uses that as a gauge for market sentiment and is one of the factors that he takes into account when putting on a new position.

It is not his only indicator, but he seems to do pretty well by it, especially on shorter term time frames.

That made sense to me because any jackass (including myself) can create a Twitter account and start Tweeting their trades, but the odds of those predictions being right are very small because most people are not profitable traders.  In addition, there are going to be a few pro traders there that will be right more often than most.

When the two groups are very polarized, that may be a good time to take a position.  Similar to how people trade the COT report.

But could this be applied to Forex?

Let's take a look and the pros and cons…

Potential Benefits

Tracking one or two pairs like the $EURUSD on Twitter would give you a lot of insight into what people are thinking about the market and what the ‘dumb money' is trading.  In addition, if you know who the pros are, you can also get a feel for what the ‘smart money' is doing.

Also, watching Twitter is free and you don't have to pay for an expensive data feed.  I like free.

Potential Downfalls

One potential negative to watching the Twitter stream is that if you are easily influenced by outside opinions, Twitter could just confuse you.  There also may be the temptation to use Twitter as a primary indicator.  I doubt that it could be a primary indicator, but I won't know until I give it a try.

Also, the currency markets are huge compared to a single stock, so the ‘dumb money' may have less of an impact on the overall market.  My gut tells me that a bad trader can sniff out a bad trade in any market, but we will have to see.

My Experiment

So in addition to trading the Wallaby, I'm going to start watching the $EURUSD in Twitter and StockTwits to see if there seems to be any correlation between what people are trading and being able to predict price moves.

Want to try this for yourself?  Here is how to get started:

This is just an experiment, so DO NOT go trading real money with this idea!  But if you think this might work, I invite you to follow along and see what you think.

To follow some legit traders and analysts on Twitter, check out this list.

What do you think?  Leave a comment below…