The stock market might seem like a roulette wheel to some or a temperamental herd of cats to others, but there is more science, psychology, and art to trading than simply picking the stocks that match your initials. No one can predict the future, but Dallas-based “social media stock sentiment analysis” company HedgeChatter says that it has the next best thing.

HedgeChatter, which was part of the 2013 class of the B2B accelerator Tech Wildcatters, specializes in mining and analyzing social media data for financial predictions. It does this by monitoring keywords and trending financial conversations on sites like Twitter.

When I spoke to HedgeChatter co-founder and CEO James Ross, he told me that most analysts focus on market sentiment, but that is only one indicator in a sea of information. Using social media data, HedgeChatter has developed a suite of indicators that can tell users not only which way a stock may go, but what they should do about it.

According to Ross, the key to HedgeChatter’s success is its focus on a multi-step process that ensures the advice it gives is accurate and reliable. These steps include aggregating large volumes of data, cancelling out irrelevant noise, and tracking the success of predictions made by social media users. Users who are consistently correct given a higher reputation ranking and are followed more closely for future predictions.

Market manipulators

While plenty of financial analysts and investors use social media for completely legitimate purposes like stock research or networking, it has also come to be used as a tool for  people intentionally spreading false information and rumors to manipulate the market.

A common tactic, Ross says, involves one company buying low valued stock and then hiring a third party to spread false rumors in social media to artificially inflate the share price. The company then sells the stock at a high price before the market catches on to the manipulation.

While Ross admits that HedgeChatter can’t necessarily tell who is behind these types of shady deals, it can often detect when market manipulation is taking place, alerting potential investors to be cautious about the stock.

Image credit: HedgeChatter (c)