Rise of the social media trader

When the share price of GameStop exploded in January, many in the financial press were confused. Why were these traders getting their information from Reddit and not the Wall Street Journal or Financial Times?

But for many day traders social media has long been a valuable and free source of trading insight.

A survey for Exness found that social media was the most used source of information for Millennial and Gen Z day traders, with over half (51%) of Millennials and three quarters (74%) of Gen Z traders regularly using sites like Facebook, Twitter and Reddit. 

Social media trumped newswires (used by 47% of Millennials) and company reports (used by 40% of Millennials) for its usage. 

“Back in the early 2000s, it was Yahoo Finance. Nowadays it is Reddit, YouTube, Clubhouse, Slack and Whattsapp”

There can be big benefits to investors in using social media. As well as demystifying the markets for small scale investors, it provides rookies with opportunities to learn and gain support from more experienced traders. All without having to go on a course or subscribe to expensive news services.

Take a recent Reddit thread where a poster asked “What do you think is the easiest way to educate yourself in how to make profitable trades?”. The post yielded all sorts of helpful advice from backtesting trades, using simulated accounts and starting off with small bets to learn the ropes. 

One person replied: “Reddit and YouTube taught me. Trading real money and learning how to control my emotions has been my biggest lesson. When things go bad don’t get discouraged. Good luck on your journey. I believe in you.”

Trading with help from social media is also seen as a way of ‘sticking it to the man’, an anti establishment way for regular folks to make money in a way that has  traditionally only been open for Wall Street types. 

When one trading platform halted trading in GameStop and a number of other stocks in early 2021, one redditer posted: “THEY ARE TRYING TO SHUT US DOWN! YES, it is rigged! We have them shaking in their boots. But we are larger and united.”

“Trading with help from social media is also seen as a way of ‘sticking it to the man”

While social media may be easy and free to access - particularly useful for traders who are just beginning to hone their skills - the quality of information on specific trades can be poor. Influencers can also overhype certain trades or strategies because they are hoping to make a profit on that strategy. The Exness survey found that over four fifths (83%) of traders who made no profit or were in a losing position on their trades used social media. 

We saw this play out with GameStop and other memestocks. While many Redditers made big money from the rollercoaster ride, others lost their savings. One North Carolina fish farmer told Forbes that he lost over $20,000 of his savings by betting on GameStop options, despite his trades being $300,000 up at one point. 

So it pays for day traders to critically assess the value of social media and use additional information to confirm whether the information is useful. That could be using technical analysis tools, such as Bollinger Bands or Exponential Moving Averages, which are the number one used resource for traders that trade over 50% of their income. 

Or backtesting software, which simulates how a trade would  perform -  rarely used by younger traders, with just 11% of Gen Z traders and a quarter (26%) of Millennials using the software. 

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