April 30, 2020

Trading with Google Trends

As a trader, you are always looking for a profitable way to trade. There are hundreds of different ways to find out which asset to invest in. There are often two dominant concepts that cover almost all other factors: technical analysis and fundamental analysis. The technical form of analysis bases the entry and exit moments on the graph of the price. If a certain form or line can be formed, this is the sign to take action. The fundamental side of analysis goes deeper into the company. What are the underlying motivations of the company, what is the long-term potential, what patents does a company own, how healthy is the company culture, in short, a lot of factors. Now there is a way of analysis that nicely combines these two forms: trading based on Google Trends. In this article we show you how to do this and how you could apply it yourself.

BOTS by RevenYOU | Trading with Google Trends
BOTS by RevenYOU | Trading with Google Trends

What is Google trends?

First of all, it should be clear what Google Trends is. It is a tool introduced in 2006 by Google to see how popular a certain search term is. In the Google Trends overview you enter a word, or a number of words, and you get a graph showing how much is searched for this particular keyword. This data is retrieved directly from Google, which accounts for the vast majority of search traffic on the entire internet. You also have the possibility to compare certain words with each other in order to recognize any connection. So it is a tool with which you can recognize a trend that is going on and possibly predict when a trend is coming. If you can predict trends, it gives you a step ahead of the rest of the market, perfect in the investment world. 

Trades based on Google Trends

If you play it smart you can use Google Trends to analyze the interest in certain assets. As an example we take an article by Jon Thralow of Data Driven Investor. He shows how he works when he makes investment choices based on Google Trends. He shows how to divide a company in the search term of the name of the company, and the name of the share. A logical assumption is that the price of the company's share rises when more searches are made on the company itself, but in practice this often works very differently. 

As an example he takes the company Apple and the underlying share with the ticker AAPL. If we start with the graph above, the price of Apple's share, AAPL, we can see that there has been an upward trend since 2004. But, if you look closely, you can also see that there have been several periods in which the stock has enjoyed a longer downtrend. This can be predicted by Google Trends. However, if we compare the two charts with search volume on both terms you will see that there is no direct link between the interest in the company and the interest in Apple's share.

Global search volume on the term Apple from 2004 to date

Worldwide search volume on the term Aapl from 2004 until today

According to Thralow's theory you can predict what the price will do in the future by using both graphs. He uses the principle of billionaire and legendary investor Warren Buffet: "Be anxious when others are stingy and be stingy when others are anxious" . He implies the following two rules;

  • If there is a high interest in the Apple products, then this is a good time to buy the stock. If there is low interest in the products, it is a good time to sell the stock.

  • If there is a high interest in Apple's stock, it is a good time to sell the stock. If there is low interest in the share, it is a good time to buy the share.

Then when we look at the current state of Apple's share, you can see that there's a decrease in search volume on both terms. Recently, there was a peak in the search volume on the word Apple, probably to bring back to the announcement of the iPhone 11 or another product. This would have been a good time to buy the stock, which is also reflected in the graph of the stock itself. At this moment both indicators are on neutral and no good prediction can be made. So if you own an Apple share, it's wise to hold your share for now. If you don't own a share yet, it's just a matter of waiting for the right moment. 

Market sentiment 

However, this is not the only way to apply Google Trends. Another article presented by Harrison Schwarts for SeekingAlpha shows a different way of analysis. Where the previous strategy was more focused on the individual share, this indicator focuses on the overall market sentiment. Based on different search terms it can be determined whether the market sentiment is positive, bullish, or negative, bearish. Search terms such as 'stocks to buy', 'top stocks', 'buy stocks' and 'how to invest' are used to show a positive market sentiment. The search terms 'how to sell stocks', 'sell stocks' and 'how to short sell' are used to show a negative market sentiment. This data is then presented in the following graph:

As you can see there is some overlap between the two terms but in general one always wins over the other. This data allows you to write an algorithm that takes actions based on the winning search terms. The algorithm acts on the basis of two rules:

  • If the sentiment is positive, the algorithm automatically invests in so-called consumer discretionary, luxury products that are not essential for survival. 
  • If the sentiment is negative, the algorithm automatically invests in so-called consumer staples, essential products for survival.

For both options a fund is linked that invests in different shares on both possibilities. This prevents possible candy dives in individual shares that are invested in. As a confirmation of the theory this has been placed next to the S&P 500, a reflection of the overall stock market. The result is positive:

As you can see, both strategies have a starting position of $10,000 dollars. However, the Google Trends strategy yields on average 10% per year, and the S&P 500 7% on average. In short, the strategy outperforms the market. 

What can we learn from this?

As you can see, Google Trends can therefore be a very valuable source of information as an investor. If you do fundamental analysis, you can find out how many people are doing the same research with you. For the technical analysis there are more concrete examples. Using Google Trends you can develop your own strategy that is very easy to automate.

At RevenYOU we've been calling it "Bots trade better than humans" for a while now, so again it's certainly not a bad idea to build a bot based on Google Trends instead of executing each order manually. Who knows, maybe soon there will be a bot available in the application based on an indicator of Google Trends.

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