Have you heard about the "buy the rumor, sell the news strategy? Is it capable of making us identifying good trading opportunities with high rates of profit?
Many traders see news releases as a good opportunity to react, but some others may shy away from it. They avoid the market when important news is about to be released. A few who capitalize on it though, are familiar with a specific term called "buy the rumor, sell the news".
Also known as "buy the rumor, sell the fact", it is quite a risky plan but may bring you a good sum of fortune if you can execute that plan correctly. Traders on the stock market often do the same thing as well. They buy shares of a profitable company to earn a good amount of dividends. But as soon as the cum date/ex-date has passed, they release their shares back to the market. That is how the precarious "buy the rumor, sell the news" worked on the stock market. Oftentimes, the price drops after the dividends are distributed.
On the forex market, "buy the rumor, sell the news" is often seen when the traders are anticipating a change in interest rate. They seek undervalued or oversold currency and when a rumor about its increase in value is spreading, they buy said currency often to the point of overvalued.
This strategy can also be done in reverse and is called "sell the rumor, buy the news". The strategy is planned when the interest rate is about to go down. For example, when the trader thinks that a certain central bank is going to reduce its interest rate around 25 points, he will short it to the point or even beyond the undervalue threshold. After the central bank actually announces a decrease in interest rate, he will immediately take profit from that short position.
Nevertheless, the scenarios around an interest rate announcement are not always the same. The opposite things can happen as the market is truly unpredictable.
The Implication of "Buy the Rumor, Sell the News"
This strategy might be tempting, but take some time to ponder upon the risk it carries with. Despite the common perception that good news means a bullish market and bad news equals a bearish market, everything is not that simple.
As a matter of fact, a short-term shift in exchange value is often caused by perception toward market sentiment and less likely caused by a certain theory. The rise in interest rate does increase the exchange value of a certain currency, but it will only happen in the long run. Besides, the interest rate is not the only cause for an alteration in exchange value. There are many other things to consider as fundamental factors.
Besides, are you really certain of the news you have heard? It is true that uncertainty is an everyday occurrence, but would not it be better if we can make it as certain as possible? Sometimes, the price goes in a direction that we do not expect. Daniel Kahneman, an economist and a Nobel Prize winner, once wrote in his book that traders process information differently. This leads to the many unpredictable outcomes that can trap unassuming traders who still rely on common theories.
A Risky Path For Traders
For beginners or even experienced traders with conservative tendencies, the aforementioned discussion might be enough to avoid the "buy the rumor, sell the fact" strategy. Another reason to stay away from this method is that the moment before or after a news release is the worst time for trading because there is a contradiction between theory and reality.
Without any information coming from an insider, there is no way we can accurately predict where the lines are heading. Although the only thing that is certain in forex trading is uncertainty, said moment is much riskier than other situations. That is why taking advantage of market euphoria on news releases can be the worst moment to trade.
With all that being said, no one forbids you from stirring up the market by following the "buy the rumor, sell the news" strategy, because some people do earn a nice profit out of it. But rather than be crushed by uncertainties, it would be better if we just wait until the news is settled and the market has digested the information published. It will be easier to identify the sentiment following the news release and where the price heads after. This way, you can detect trading opportunities from price trends, retracements, or reversals, and prevent loss.
Understanding a strategy is not the only crucial thing if you want to profit consistently from the market. Should you find a trading opportunity, you need to be able to figure out the ideal entry and exit positions.
3 Comments
Nov 3 2022
This strategy is similar to what inside the forex market stirs the market with news and capitalizes on it. And to me, this strategy is like speculating on uncertainties, except like the article that says you have insiders telling you what policy and actions the central bank is taking. And on the other side, the big trader I mean "big money" comes and starts to open a position, it will affect the market after hearing a rumor that may not be true.
As a small money trader we can only watch the moment and have no power to move the market. I mean if a big buy position is opened, the price will go up and like it or not, we will open a long position causing prices are getting higher and suddenly there is news and central bank policy will cut interest rates for example that will make price go lower. Impact of that news, big money who open buy/long will close position get more profit and we as small traders that late to open position will loss money.
So, I agree with the autohr. I will rethink to use this strategy called sell the rumour, buy the news
Like the author said : "But rather than be crushed by uncertainties, it would be better if we just wait until the news is settled and the market has digested the information published. It will be easier to identify the sentiment following the news release and where the price heads after. This way, you can detect trading opportunities from price trends, retracements, or reversals"
To me, this way, it would be a better strategy than following the market euphoria.
Apr 27 2024
Hey, I've got a question about this snippet from the article. It mentions that in the forex market, there's a saying "buy the rumor, sell the news" especially when traders are expecting a change in interest rates.
But hold on a sec, isn't the rumor or news in forex trading not just about interest rates? I mean, there are so many factors like unemployment data, GDP, NFP, and others that can shake up the forex market. So, why is it that the focus here seems to be on interest rates as the main rumor? Just curious to understand the reasoning behind it.
Apr 29 2024
The concept of "buy the rumor, sell the news" in the currency market essentially boils down to how traders react to anticipated events and their outcomes.
When there's speculation or rumors circulating about potential changes in interest rates or other significant economic factors, traders often adjust their positions based on these rumors. They might buy or sell currencies in anticipation of how the market will react once the news is officially announced.
Currency rates are often subject to the "buy the rumor, sell the news" phenomenon due to the significant impact of economic events and announcements on currency valuations.
When there's speculation or rumors circulating about potential changes in interest rates, economic growth, or other key factors affecting a country's economy, traders may anticipate how these events will influence currency values. They may adjust their positions accordingly, buying or selling currencies in anticipation of the expected market reaction.