As the name suggests, ‘buy the rumor, sell the news strategy’ means you buy particular security based on rumor and when the news breaks, you sell it. This trading strategy may not sound strong.
Yet, this phenomenon happens in most financial markets. Traders usually like to use a trading strategy based on what they believe will happen in the future.
In this strategy, the phase of buying the rumor happens when a trader buys a certain asset based on their speculation. Then, the sell the news phase happens when they sell the asset once the expected report come out.
What Can We Learn from A Rumor?
Outside the foreign exchange (forex) market, commonly traders make purchases in accordance to the anticipated future cash flow. That means, the traders expect the company to give more revenue to its shareholders.
To take advantage of rising stock dividends payments, traders purchase more shares of stock as soon as possible. This strategy can also be implemented in forex trading. Yet, with this strategy, traders act based on the anticipated rising interest rates, instead of cash flow.
Commonly, traders who use this strategy choose undervalued market. Once there is news that predicts a certain asset to gain more cash flow in the future, investor will compete to buy this asset. They buy the asset up to the point where it is no longer undervalued.
There will be a selloff, if the rumor is false resulting into the market overbuys the asset. This stock will sustain its valuation only when there is a surprising news event that more than the anticipated previous rumor.
In forex market, usually a country’s central banks and its interest rate can create both rumor and news. It signals a strong economy, thus forex traders can expect an increase in their currency value.
The Consequences of ‘Buy the Rumor, Sell the News’ Strategy
A trader can get frustrated if they buy something they expect to be strong in the near future, turns to lose value in a sell-off. That can happen for various reasons.
Yet, traders can have a different result, if they process the information in a different manner. One trader may choose to takes some time to process the news before he decides to make a trade. The other traders, on the other hand, may act impulsively right after the rumors come out.
Usually, the know-traders will get more opportunities than slow-to-act traders.
Writer: Lisa Ramadhani
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