What Is "Buy the Rumor, Sell the News" Trading Strategy?
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Updated on December 20, 2022.
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In This Article.
In This Article.
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Definition.
" Buy the rumor, sell the news " is an adage that refers to a trading strategy where a trader buys a security based on speculation about an upcoming news announcement or data, and then sells the security once the news is made public. This could give the trader an opportunity to buy the security before everyone wants to buy it, and turn a profit by selling it when the demand and the price increases.
Key Takeaways.
Buy the rumor, sell the news is a trading strategy that can be used by traders eyeing short-term profits in different financial markets In this strategy, you buy a security based on speculation about an upcoming news event and you sell the security when that news is announced. The idea behind buy the rumor, sell the news is to buy a security before a news even that will lead to an increase in its price and then sell it for a profit. Disadvantages of the strategy include lack of accuracy and potential loss of opportunity on decisions not made quickly enough.
How Does Buy the Rumor, Sell the News Work?
Buy the rumor, sell the news is an adage that describes a common occurence in most markets, particularly financial markets. Traders sometimes turn this idea into a trading strategy that draws upon what they believe will happen in the future.
Suppose a trader expects that an upcoming economic report or world event will alter the price of their asset in a given way. When the trader buys an asset-based on this instinct, that is the rumor phase of the strategy. Once the event passes or the report is released, the news has been made public. The trader then dumps their positions, and the market moves.
Note.
Buy the rumor, sell the news strategy can be used for trading in different financial markets such a stocks, derivatives, foreign exchange (forex) and even commodities markets.
Investors who use this strategy tend to seek out undervalued markets. When potential news or info suggests that an asset may produce more future cash flows, this is the "rumor." The asset is rumored to be worth more in the next few weeks or months. Investors will buy that asset up to the point where it is no longer undervalued.
If the rumor is false, or the market overbuys the asset so that it is no longer undervalued, then news that falls slightly below expectations will cause a selloff. Only a surprise news event that beats the rumor will cause the stock to sustain its valuation. If a surprise news event is positive enough, it could potentially push the value even higher.
Example of Buy the Rumor, Sell the News.
A common example of buy the rumor, sell the news in the stock market is trading based on the expectation on a company's quarterly earnings report. Perhaps there's a rumor that a company is expected to provide more revenue to shareholders than previously thought. In that case, traders will buy the stock quickly to take advantage of increased dividends or stock prices. Once the company has its earnings call or makes its results public and the stock rises on strong revenue, the traders will sell their shares to turn a profit.
This behavior also applies to forex, but instead of cash flows, traders often act on anticipated interest rate changes. Here's how the rumor works in forex. When a central bank raises interest rates, it often signals a strong economy. In that case, forex traders expect the currency's value to increase. Suppose a forex trader catches wind of a plan for a central bank to raise interest rates. Based on that rumor, the trader may buy up the corresponding currency. Next comes the news. When the central bank actually moves the interest rate, the forex trader will watch as the news pushes the currency's value higher. Once the currency hits a high enough value to earn the trader a nice profit, that trader will "sell the news" and trade the currency at a higher price.
Disadvantages of Buy the Rumor, Sell the News.
Not Accurate.
No one can time the market with absolute certainty and buy the rumor, sell the news trading strategy is no different. There can be a number of reasons why this strategy could fail to yield a profit for traders.
Note.
If there's a rumor among traders about an upcoming news event, chances are that the market has already moved in the direction of the new or the information is already "priced-in". If that's the case, the market may not move as much as expected when the news is finally made official and the trader employing the strategy may not make as much of a profit.
Another example could be that the new itself may not live up to the expectation. For example, in a bear market a company that beats expectations in its quarterly earnings may still see its stock price fall because the good news may not have lived up to the hype.
Speed of Decision Making.
If you're a trader, one of your big frustrations is buying something you know to be strong, only to see it lose value in a sell-off. There are many reasons why this could happen, but it could come down to differences in the way traders process information. One trader may take time to digest the news before making a trade, while other traders act quickly as soon as the rumors come out. Traders who are slow to act often provide liquidity for those who are in the know. Those traders then take advantage of either the "rumor" or the "news."
The Bottom Line.
When a good news event comes out, and the price rises, entering on that good news release can potentially be the worst time to enter the market. That is when everyone else who bought the stock at the lower price may be getting out of the market in order to reap a profit.
There are few things in trading more frustrating than being the source of liquidity for other traders. One of the best ways to avoid that fate is to hold out for a price trend reversal after a good news event. It can be more to your advantage to wait for a brief reversal in price direction and buy at a better price.
Frequently Asked Questions (FAQs)
How do you learn to trade the news?
Trading the news can be difficult, and the price won't always move in a way that seems logical or connected to the underlying news event. To get good at it, it's best to paper trade in a demo account first. Practice buying rumors and selling the news until you are certain that you have a consistently profitable strategy.
What is the best GBP pair to trade the news?
The GBP/USD pair is among the most liquid currency pairs in forex trading. If your trade strategy depends on swift reactions to sudden news events, then that liquidity may help you jump in and out of positions as quickly and precisely as possible. However, if the news event involves Britain and another country, it may be better to trade that pairing to target that news more specifically.