Enhancing Equity Trading through Ensemble Learning with Reddit Sentiment Analysis and Explainable Artificial Intelligence

The challenge of accurately predicting stock market movements largely stems from its nature as a game with incomplete information. With the emergence of social media, platforms like Reddit became key arenas for expressing financial senti-ments, offering new insights into market dynamics influenced by retail investors. In this study, we trained an XGBoost model using daily financial data for Tesla, including technical indicators and sentiment analysis derived from Reddit posts about the company. This approach enhanced the model's ability to predict market directions, achieving a statistically significant improvement in accuracy with a p-value of 0.000237. Furthermore, our model is equipped with Explainable AI to allow users to understand the basis of its predictions, increasing transparency and trust. Implementing a straightforward trading strategy based on these predictions yielded a 174.36% gain in a backtest from December 2022 to December 2023, outperforming the baseline stock by 42.40 points and the S&P 500 index by 147.97 points. This paper highlights the potential of leveraging social media sentiments to gain deeper market insights.