Trading bitcoin, shares, and more with the help of Google Trends
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Trading bitcoin, shares, and more with the help of Google Trends
Investing Basics
August 2, 2021

Trading bitcoin, shares, and more with the help of Google Trends

As a trader, you are always looking for the most profitable trading strategies. There are hundreds of ways to find the right assets to invest in. In general, two dominant concepts cover almost all factors regarding trading and investing: technical analysis and fundamental analysis. Technical analysis determines entry and exit points based on the chart of an asset. If you can recognize a particular shape or line, it could be considered a sign to take action. The fundamental side of analysis goes deeper into the underlying business. For example, what are the underlying motivations of the company, what is the potential in the long term, which patents does a company own, and how healthy is the company culture? In short, a lot of factors can help to decide if a business is a good investment or not. Now, there is a way of doing analyses that combines these two forms: trading based on Google Trends data. In this article, we show you how to approach this and how you could apply it yourself.

What is Google Trends?

First of all, let’s take a look at what Google Trends is. It is a tool introduced in 2006 by search engine Google to see how popular a particular search term is. In the Google Trends overview, you can enter a search term, one word or multiple, after which you will receive a graph and more interesting data that shows how much people are searching for this particular search term. This data is taken directly from Google, which accounts for the vast majority of search traffic on the entire internet worldwide. With Google Trends, you also have the option to compare certain words to identify any connection. All in all, it is a tool that allows you to spot a trend that is underway and possibly predict when a trend is imminent. If you can predict trends, it will help you get ahead of the market, perfect in the investment world.

Trading based on Google Trends

If you play it smart, you can use Google Trends to your advantage by analyzing the interest in certain assets. As an example, let’s take an article written by Jon Thralow of Data Driven Investor. He shows how he works when he makes investment choices based on Google Trends. For example, he shows how you can divide a company in the search term of the name of the company and the name of the share. Of course, a logical assumption is that the price of the company’s share rises when more people are searching for the company on Google, but in practice, this often works very differently.

As an example, he takes the company Apple and the underlying shares with the ticker AAPL. If we look at the above chart of Apple’s stock price, AAPL, we can see that it has been in an upward trend since 2004. However, if you look closely, you will also see that there have been several periods in which the stock saw a more extended downtrend. This can be predicted based on Google Trends. However, if we put the two search volume charts on both terms side by side, you will see no direct correlation between interest in the company and interest in Apple’s stock.

Worldwide search volume for the term Apple from 2004 to the present

Global search volume for the term AAPL from 2004 to the present

According to Thralow’s theory, you can use both graphs to predict what the price will do in the future. He uses the principle of billionaire and legendary investor Warren Buffett: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” Here he implies the following two rules;

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

If there is high interest in Apple’s stock, it is a good time to sell the stock. Conversely, if interest in the stock is low, it is a good time to buy the stock.

If we look at the current state of Apple’s stock price, you can see that there has been a decrease in search volume on both terms. However, around October of 2020, there has been a spike in search volume for the word Apple. This surge is likely the result of the announcement of the iPhone 12 or another product. This would have been the right time to buy the stock, which is reflected in the stock’s chart as well. At the moment, both indicators are neutral, and no good prediction on the stock price can be made. Therefore, if you own an Apple share, it is wise to hold your share for now. If you do not yet own a share, it could be wise to wait on the sideline for now. With the end of the year approaching, Apple will likely introduce new products soon. So keep an eye on the Google Trends data to spot a possible good time to buy!

Market sentiment

However, this is not the only way to apply Google Trends. Another paper presented by Harrison Schwarts for SeekingAlpha shows a different approach to analysis based on search volume data. While the previous strategy focuses more on the individual stock, this indicator focuses on the overall market sentiment. Based on various search terms, one can determine 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 positive market sentiment. The search terms ‘how to sell stocks,’ ‘sell stocks,’ and ‘how to short sell’ are used to show negative market sentiment. This data is then presented in the following chart:

As you can see, there is some overlap between the two, but one always wins over the other in general. Therefore, this data offers the possibility to write an algorithm that takes actions based on the winning search terms. The algorithm operates based on 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 stocks from both options. To confirm that this strategy beats the market, you’ll find a chart below with the S&P 500 compared to the return on investment (ROI) of the Google Trends strategy. The result is positive:

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

Would this work with bitcoin (BTC) and crypto in general?

As shown on the chart above, Google Trends can be a precious source of information for an investor. If you do fundamental analysis, you can find out how many people are doing the same research as you. Using Google Trends, you can develop a strategy that is very easy to automate.

With the rapid-growing crypto market, you can also use this strategy when trading crypto. Bitcoin and cryptocurrencies like ethereum (ETH) and cardano (ADA) exist solely in the digital world. Therefore, a lot of information can be found about them online as well. Also here, the interest tends to move in cycles and is highly influenced by hypes (think of the impressive Dogecoin (DOGE) hype). With Google Trends, you can spot these hypes and trends early and act based on this observation.

At RevenYOU, we’ve been saying it for a while now: “Bots trade better than humans.” With Google Trends, it is pretty straightforward to build a trading bot based on this data that executes orders automatically at the right moments. So, it wouldn’t be unsurprising to find a bot in the BOTS app that follows this strategy. So, keep an eye on the BOTS app and also discover our other trading bots!

There is no such thing as risk-free trading. It is possible to lose (part of) your stake.

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