What Does It Mean to Trade Using the “Buy the Rumor, Sell the News” Strategy?

The expression “buy the rumor, sell the news” refers to a trading strategy in which a trader purchases a security on the basis of speculation regarding an upcoming news announcement or data, and then sells the security once the news is made public.

This strategy is described in the proverb “Buy the rumor, sell the news.” This might provide the trader with an opportunity to purchase the security before everyone else wants to purchase it. The trader could then realize a profit by selling the security when both the demand for it and its price increased.

Key Takeaways

• Traders that are interested in making short-term profits in a variety of financial markets may find success with the trading method known as “buy the rumor, sell the news.”

• To implement this tactic, you will first acquire a security on the basis of your speculation regarding an impending news event, and then you will sell the security after the news has been disclosed.

• The concept of buying a security before a news event that will lead to a surge in its price and then selling it for a profit is the basis of the strategy known as “buy the rumor, sell the news.”

• The technique has a number of drawbacks, including a lack of precision and the possibility of missed opportunities as a result of judgments that were not made soon enough.

How exactly does one go about participating in Buy the Rumor, Sell the News?

An old saying that says “buy the rumor, sell the news” refers to a phenomenon that frequently takes place in many places, particularly the financial markets. Traders will often include this concept into a trading strategy that is based on their expectations on what will take place in the future.

Imagine for a moment that a trader believes that a forthcoming economic report or global event would influence the price of the asset they are trading in a specific way. The rumor phase of the technique refers to the time when the trader makes a purchase of an asset on the basis of this instinct. The report is considered to have been made public once it has been completed or once the event has occurred. After then, the trader liquidates their positions, which causes the market to move.

Note
The “buy the rumor, sell the news” trading method is applicable to the trading of stocks, derivatives, foreign currency (forex), and even commodities on a variety of different financial markets.

Investors that employ this tactic frequently look for markets that are currently undervalued. The term “rumor” refers to the situation in which potential news or information suggests that an asset may provide additional future cash flows. It is said that the value of the asset would increase in the following few weeks or months. That asset will be purchased by investors up until the moment where it is no longer considered to be undervalued.

A selloff will occur in the event that the rumor is untrue, or if the market overbuys the asset to the point where it is no longer inexpensive. This will happen in the event that the news falls slightly below expectations.

The stock’s current valuation can only be maintained if an unexpected piece of news occurs that contradicts the rumor. If an unexpected news event turns out to be sufficiently positive, it has the ability to drive the price even higher.

A Real-World Illustration of the Buy the Rumor, Sell the News Strategy

In the context of the stock market, one popular example of the strategy known as “buy the rumor, sell the news” is trading based on an expectation of a company’s quarterly earnings release. There may be a rumor going about that a certain corporation is projected to produce greater levels of revenue to its stockholders than was originally estimated.

If this occurs, market participants will move rapidly to purchase the shares in order to benefit from the increasing dividends or stock prices. As the firm conducts its earnings call or makes its results public, the traders will sell their shares in order to turn a profit once the stock rises on the back of good revenue.

This behavior is also applicable to forex, but traders frequently base their decisions on predicted interest rate fluctuations rather than cash flows. The following is an explanation of how the forex rumor works: The decision by a central bank to boost interest rates is frequently an indication of a robust economy.

Forex traders anticipate a rise in the value of the currency should this scenario occur. Let’s say that a forex trader hears that a central bank is considering raising interest rates and acts accordingly. On the strength of such rumor, the trader might decide to stock up on the relevant currency. The news will be presented next.

When the central bank actually makes a change to the interest rate, the foreign exchange trader will observe as the news causes the value of the currency to increase. The trader will “sell the news” and trade the currency at a higher price once the currency reaches a high enough value to give him a big profit. This will occur after the currency has reached its maximum potential.

Disadvantages of You should invest in the rumor and short the inaccurate news.

Not Accurate

The buy the rumor, sell the news trading technique is similar to other trading strategies in that no one can timing the market with complete precision. There are many possible explanations for why traders using this approach might not make a profit from their efforts.

Note
If there is a rumor circulating among traders about an anticipated news event, there is a good likelihood that the market has already moved in the direction of the new information or that the information has already been “priced-in.”

If this is the case, the market may not react as strongly as anticipated when the news is finally released, and the trader who employs the method may not see as much of a profit as a result of their use of it.

One other illustration would be that the novelty, in and of itself, might not live up to the anticipation. For instance, in a bear market, a firm that reports quarterly results that are higher than expected may nevertheless face a decline in its stock price since the good news may not have been able to live up to the expectations that were set for it.

The rapidity with which decisions are made

One of the most frustrating things about being a trader is buying something that you believe to be strong, only to watch its value decrease as a result of a sell-off. There could be a number of factors at play here, but ultimately, it may boil down to variances in the ways in which different traders absorb information.

While one trader could need some time to process the information before engaging in a transaction, other traders might move swiftly as soon as the rumors are made public. Speculators who are sluggish to act frequently serve as a source of liquidity for market participants who are more informed. Those traders then profit from either the “rumor” or the “news,” depending on which one is more accurate.

The Bottom Line

When there is a release of positive news that is followed by an increase in price, it is possible that this is the worst possible time to enter the market. When this happens, it’s possible that everyone else who acquired the stock at a cheaper price will sell it in order to cash in on their profit and exit the market.

Being the source of liquidity for other traders is one of the few things in trading that can be considered the most annoying. Waiting for a price trend reversal following a positive news event is one of the most effective techniques to steer clear of that unfortunate outcome. It may be to your advantage to wait for a temporary reversal in the direction that prices are moving before making a purchase at a better price.

Questions That Are Typically Asked (FAQs)

How exactly does one become proficient in trading the news?
Trading the news can be challenging, and the price won’t necessarily move in a way that seems reasonable or is tied to the underlying news event. This can make trading the news tough. It is recommended that beginners begin by “paper trading” on a demo account before moving on to the real thing. Until you are satisfied that you have a plan that is consistently lucrative, you should engage in the practice of purchasing rumors and selling the news.

Which of the GBP pairs is ideal for trading based on the news?
When it comes to foreign exchange trading, the GBP/USD pair is considered one of the most liquid currency pairs. If your trading strategy is dependent on prompt responses to unexpected news developments, then that liquidity may assist you in entering and exiting positions in the market in the most timely and accurate manner feasible.

If, on the other hand, the news occurrence involves Britain and another country, it is possible that it would be preferable to trade that pairing in order to target the news in a more precise manner.