'Buy the rumour, sell the news' explained
Traders who follow the maxim ‘buy the rumour, sell the news’ will open a position on speculation ahead of a news announcement that could affect an asset’s price. Learn about this adage and whether there is any substance to it.
What does ‘buy the rumour, sell the news’ mean?
‘Buy the rumour, sell the news’ promotes the idea of capitalising on market movements by opening a position on a rumour, in anticipation of an announcement that could cause a shift in the markets. The trader will then close their position once the news has broken, often at a considerable profit.
News traders typically base the majority of their trading decisions on news announcements such as breaking news, economic reports and company declarations that could affect an asset’s value. This is because the financial markets usually react to news announcements.
Speculation or analyst expectations can cause the price of an asset to move in advance of the announcement itself, as traders start to anticipate the effect that the news will have on the asset’s price. This is where ‘buy the rumour' comes from.
Through financial derivatives such as CFDs, traders can use the ‘buy the rumour, sell the news’ idea to bet on markets that they think are either going to rise or fall. This is because CFDs affords the ability to go long as well as short.
Buying an asset on a rumour carries a degree of risk, because there’s always a chance that the actual announcement will be different to what was rumoured. As a result, the news could be good for a trader, but it could equally be bad.
How do rumours affect markets and stock prices?
Rumours can affect the markets and stock prices as traders may open or close positions based on analysts’ expectations. This can cause a stock’s price to move up or down if enough traders hear and act on the rumour.
Generally, traders will seek to profit in the run-up to an announcement, as by the time an announcement is made, the effect that it might cause has often been ‘priced in’ to the value of the company’s stock.
If the announcement were to go against, or significantly exceed expectations, then it could have an even greater effect on the overall trend of an asset. As a result, a trader who opened a position on the rumour could see themselves either incurring a severe loss, or earning an even greater profit than they thought.
Equally, when the news eventually breaks that confirms the rumour, the prevailing trend usually reverses as the early traders who caught onto the rumour start to sell their stakes.
‘Buy the rumour, sell the news’ example
Let’s say that a forex trader heard a rumour that the Bank of England (BoE) was going to increase interest rates – which would likely increase the value of GBP. In anticipation of the announcement, traders might open positions on popular GBP currency pairs like GBP/USD or GBP/EUR.
If the trader was right, and the BoE did indeed raise interest rates, they would have opened their position during the rumour. In doing so, the trader would have secured themselves a much better exposure to profit when compared to someone who had taken a position closer to the announcement.
News trading is the primary strategy used by traders who wish to buy the rumour and sell the news. News traders typically have an in-depth knowledge of their chosen market, which enables them to make educated guesses about the outcome of anticipated news announcements.
News traders will often know when things like central bank announcements or the non-farm payrolls report in America are going to be made. Typically, news traders will take a position on an asset in the run-up to these meetings and reports, according to any circulating rumours about their outcome.
‘Buy the rumour, sell the news’ can also be effective when used as part of a day trading strategy. For instance, every morning there are different news reports around the world which could affect an asset’s outlook for that day. There are also rumours that spread before big meetings between heads of state, or in anticipation of a government’s response to a geopolitical situation.
As an example, if something happened overnight in America which could affect the value of USD, day traders might then dedicate their time to speculating on USD currency pairs. They would do this in the hope of capitalising on the news announcements and rumours that are circulating throughout the day.
Position trading is a long-term strategy compared to news trading or day trading, but it can also yield returns for a trader who believes in ‘buy the rumour, sell the news’. For instance, there were rumours before the OPEC meeting in December 2018 that the group and its affiliated non-members were going to cut their production of oil to reduce the global supply. Abiding by the basic economic laws of supply and demand, a reduced supply with a constant demand increases an asset’s price.
As a result, some traders began to buy up oil futures before the meeting because oil prices were dropping quite rapidly. Surely enough, OPEC announced that it would restrict supply by 1.2 million barrels per day, which caused oil prices to enter a recovery after hitting some of their lowest prices for years.
Traders who opened a position on the rumour have since been able to reap the benefits as oil’s downward trend reversed at the start of January 2019.
Summing up ‘buy the rumour, sell the news’
- The idea is to buy an asset in the early stages of a supposed trend and sell once that trend has been confirmed by news reports or company announcements
- To be successful, a significant number of traders need to believe the rumour in order to induce a period of buying to drive the price of an asset up ahead of any news reports
- The strategy can be risky as the rumours are often not substantive – which is why analysis of an asset is important before opening any positions
- It requires a trader to constantly monitor market news and company announcements
- News traders often employ a day trading strategy, but position trading strategies can be effective for long-term trends
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