'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 afford 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.
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