Google Trends – your new trading analyst
Knowing what finance terms people are Googling can give you an investment edge. That’s according to three academics who analyzed changes in the frequency of 98 terms – such as revenue, credit and Nasdaq – in Google searches from 2004 to 2011.
Applying a trading strategy based on peaks and troughs in search terms resulted in triple-figure returns in some cases. “The more the term ‘debt’ was searched, the more likely that stocks were sold lower a week later,” says Tobias Preis, associate professor of behavioural science and finance at Warwick Business School, who led the study.
Had an individual traded based on the number of times the word ‘debt’ was Googled, they could have had returns of up to 326%.
Where there was an increase in searches on financial terms or a company, there was more likely to be a drop in the stock market or single stock the following week. And where there was a decrease in the searches, there was more likely to be an increase in stock price.
That leads to several trading strategies based around Google Trends, says Preis. “If there is a surge one week then that is a signal of investor concerns and so we open a short position in the index or company and buy it back one week later,” he says. “Conversely we go long when there is a decrease in searches.”
Preis says he and his fellow analysts have been contacted by numerous people in the financial industry regarding the data. “It’s an exciting discovery linking information gathering to trading,” he says. “And already we are seeing people using information trends as part of a trading strategy.”
Here’s another way to get an edge – move closer to the servers: