Can Google trends predict stock market movements? In theory, forecasting stock market movements using Google trends is possible. Throughout this stock trading guide, we’re going to put to the test some Google trends trading strategies and see how using Google trends can provide a true edge.
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If you can predict stock market tops and bottoms you have the opportunity to be a little bit more strategic than the next trader. The Google trends tool can give you valuable information in understanding how market participants behave and their desires. One of the key features that can be extrapolated from the Google trends tool is market sentiment.
If we can tap into the market sentiment and we can see what stocks are hot right now, we can gain a valuable edge in the stock market.
Even if you know how to use Google trends for market research, you’re going to learn new trading tactics and new ways of using Google trends for investing.
With that said let’s get back to the basics and first explain what Google trends is and how to use this tool to make stock predictions.
What is Google Trends Stock Prediction
Google trends is a tool that lets you analyze what people’s intentions are and what they are searching on a daily basis. Basically, it’s a search trend feature that lets you investigate what the entire world is searching for.
To put things into perspective, we’re going to share with you 3 fascinating Google search statistics:
- It’s estimated that Google processes 5.6 billion searches every single day
- It’s estimated that Google processes 63,000 searches every single second
- Internet users make, on average, 3-4 Google searches per day
We’re going to show how to use the Google trends tool to try to forecast stock price movements.
Let’s just dive right in:
How to Use Google Trends for Market Research
You might be wondering:
Can Google predict stock market movements?
In theory, the retail market sentiment is highly correlated with Google search volume.
When traders search for keywords such as “buy stocks, how to buy Tesla shares or buy Apple stocks,” the stock market research has found that stock will outperform.
So, this is a clear window into the trader’s intent.
And, that’s the reason why hedge funds have been using Google trends trading strategies.
We’re going to start by going through the basic Google settings in the Trends Explore section.
To access the Google Trends Explore, visit this link: Google Trends Data.
The Google trends tool allows the following settings to be adjusted:
- Interest by region – different traders from around the world may search for different stocks.
- Searches by time period – can be adjusted for short-term market sentiment and long-term market sentiment.
- Searches by category – lets you refine trends and get more personalized trend statistics. To have a more reliable overview when performing market research select the “Finance” category.
- Entity – gives the option to perform your market research not just on web search but also to look at YouTube data.
Next, we’re going to share some tips for using Google trends data to predict market movement.
Let’s get started…
When Google Trends Predict Stock Market
Let’s see how Google trends predict stock market movements.
The historical trading data revealed that a sudden spike for company names such as Tesla is connected to the number of Tesla shares traded. So, the more Google searches we measure, the more stocks of that company were traded.
Now, this doesn’t tell us a lot about stock price behavior.
So, how do we measure the bullish and bearish trend sentiment?
Sentiment analysis can be done by studying keywords such as “what stocks to buy,” “how to invest,” “buy stocks,” “top stocks.” These key phrases often appear when the stock market is hot and subsequently new investors are allured by the get-rich-quick scheme.
Historically a big spike in Google searches on these keywords indicates big spikes in the stock prices.
Below you can see the Google stats on these keywords for the past five years:
We can note three prominent huge spikes in Google search volume and in all instances, it produced a significant reaction in the stock market.
Please see the S&P 500 chart below:
The Google trends predict stock market prices because traders searching for these keywords have typically already bought (or sold) the stock. And, if everyone has bought the price can’t go any higher as there are no future buyers. The market would need new buyers to continue to go higher. So, in this instance, the stock market price has to reset and find a new equilibrium point or an area of interest for buyers to get involved in the stock market.
Note* the same is true in reverse for sellers. If everyone has sold already the price can’t go much lower as there are no sellers left.
A lot of good trading opportunities have emerged from the spike in Google search volume.
Let’s see some practical ways you can use the data obtained from the Google trends tool.
Google Trends Trading Strategies
Let me share with you a few Google trends trading strategies that you can use to trade the stock market based on the retail market sentiment.
We measured how many Google searches appeared in a given week.
For example, we measured the Google search volume for “buy stocks.”
Next, we compared the search volume for the same keyword, but in the previous week.
Based on these Google trends trading analysis, we designed a very simple and easy Google trends stock trading strategy.
The strategy works like this:
When we have fewer searches for our keyword in a given week, we bought the stock at the beginning of the coming week. The same stock position was sold a week later.
Conversely, if there were more Google searches for our keywords we sold the stock at the beginning of the coming week. The same stock position was bought a week later.
In case you haven’t noticed, we’re fading the retail market sentiment.
The most important question you have to ask is how to choose the right keywords.
We need to search for the right keyword to use it successfully as a stock market indicator.
By intuition, the “buying stocks” keyword relates to the stock markets.
However, what if we can develop a strategy to tell us how financially relevant a keyword is?
The method developed by Tobias Preis, a professor of behavioral science and finance at Warwick Business School, suggests counting how often these keywords are used in the financial literature and compare it with how many times it’s used in general literature.
For more info on this topic you can study this PDF: Can Google predict the stock market?
Moving forward, we’re going to give you some tips for Google trends stock prediction.
Tips for Using Google Trends Stock Prediction
Certain Google keywords are more valuable than others.
This means that the general market sentiment can be gauged better if we used certain keywords.
The Google data analysis has revealed that when the search volume for the keyword “debt” decreases, the benchmark stock index S&P 500 price increases. On the other hand, an increase in the volume search for the keyword “debt” leads to a fall in the price of the S&P 500.
The only negative aspect of using Google trend stock prediction is that during market uncertainty, people will search for market-related keywords without the intention of buying and selling stocks. However, the correlations are still often very strong.
Nevertheless, the Google trends tool remains useful in gauging market sentiment.
Final Words – Google Trends Trading Strategies
Luckily for us, Google records very precisely what stocks traders are trying to buy. With the Google trends stock prediction tool we can access the retail market sentiment and make profits in the stock market. These Google trends trading strategies will not help you time the market, but it can be an additional tool to help you gauge the market sentiment before prices start changing direction.
The Google trends stock prediction analysis can be used more to give you a market bias. Once you get an insight into the market direction you can then use your own stock trading strategy to time the market. Be sure to read this list of the best technical indicators.
If you haven’t used before the Google trends tool, give it a try and see how it performs for you!
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