The ‘Buy the Rumor, Sell the News’ strategy is one of the most common fundamental analysis-based trading approaches. This forex trading strategy relies on what traders believe will happen in an upcoming forex event. It all begins with a trader buying a currency on the strength of a rumor. Following the occurrence of the anticipated event (e.g., the Federal Reserve meeting), as soon as the news is up, the trader sells their positions, often at a considerable profit.
What does ‘Buy the Rumor, Sell the News’ mean?
The trading strategy ‘Buy the rumor, sell the News’ is conceived with the intent of capitalizing on future price movements by opening up a position based on a rumor.
Consider the case where a forex trader expects the price of a currency to increase or decrease in response to an upcoming economic report or world event. When the trader decides to trade a forex currency pair based on this instinct; this is when the rumor phase of this forex trading strategy comes into play. As soon as the event passes or the report is released, the news becomes public, the trader will then sell their position, and the market moves accordingly.
Buying a security based on rumors and then selling it when news goes public may seem like a risky decision, but it can also be a smart one in certain circumstances.
“Buy the rumor, sell the news” is a very common forex trading practice, used most especially in financial markets. An asset’s price may move ahead of its announcement due to speculation or analyst expectations, as traders anticipate the impact of the news on the asset’s price. It is for this reason that rumors are bought.
Financial derivatives such as CFDs allows traders to bet on markets that they think are rising or falling by buying the rumor and selling the news. The reason for this is that CFDs allow you to go long as well as short. However, investing in rumors carries some risk since the actual announcement may differ from what was rumored. Thus, a trader’s reaction to the news could be equally positive or negative. Traders who are experienced and skilled can employ this trading strategy to get an edge by anticipating future events.
How do rumors affect a currency’s exchange rate?
According to analysts’ expectations, rumors can have a significant impact on forex markets and currency prices. There can be a move up or down in the price of a currency if enough traders react to the rumor.
A forex trader will generally profit from an announcement in the run-up to it since, by the time an announcement is made, the impact it might have on the currency has been factored in. It could be even more detrimental to the overall trend of a currency if the announcement goes against, or significantly exceeds, expectations. Due to this, traders who opened positions on the rumor could incur a severe loss or make even greater profits than they expected.
When confirmation of the rumor eventually breaks, the prevailing trend usually reverses as early traders who caught onto the rumor sell their shares.
Example of ‘Buy the Rumor, Sell the News’ Forex Trading Strategy
The first step to “buying the rumor” involves discovering it before everyone else.
Consider the case of a forex trader hearing a rumor that the US Federal Reserve (Fed) is planning to raise its interest rates - likely leading to an increase in USD value. This announcement might encourage forex traders to open new trading positions on popular USD pairs such as USD/GBP and USD/EUR. If the trader had been right, and the USD had indeed raised interest rates, the trading strategy would have given them a much better chance of profiting than someone who had taken a position closer to the announcement.
Despite its popularity, this forex trading strategy still falls into the category of speculation, so the risk involved here is high. Forecasting the future always involves some error in the event that events don’t pan out as expected, so active consideration of the downside risk is extremely crucial before implementing this trading strategy. Developing a tight entry and exit strategy is crucial for beginners in forex trading. By doing this, they will always know how much money they have at their disposal.
Following a risk-reward analysis, you can place the order and await the unfolding of the events you have forecasted.
Top “Buy the Rumor, Sell the News” Forex Market Scenarios
Today, there are several market movers that influence the direction of forex trading and trigger price fluctuations. Here are some practical examples of how this forex trading strategy might be applied in a variety of situations:
Policy rate changes:
Currency exchange rates are highly influenced by the monetary policy stance (expansionary or restrictive) of a country’s central bank. Therefore, this strategy can be applied in advance of a policy decision being taken by the central bank, in light of the expectations for the policy rate to change.
Country’s fiscal stance:
The fiscal policy of a country is the next major factor that influences its currency. Market perceptions of the riskiness of a country’s currency can change as the government’s stance on ideal terms of trade changes. It is possible to anticipate and take advantage of these changes when they occur.
Key economic events:
Economic data serve as a primary indicator of a country’s foreign exchange rates, and they can be used to predict the future direction of the economy. By analyzing and forecasting data from events such as announcements of industry data, GDP figures, jobs data, and so on, one can take advantage of the gaps the market has missed out on while discounting the asset prices.
Trader buys in these cases because they are expecting a favorable outcome. Assuming the news is consistent with expectations, the forex trading strategy suggests selling when it comes out. The trader may decide not to sell if the news is much better than expected, since the better-than-expected news may attract additional buyers and push the price up even further.
Resources to help you implement this trading strategy:
In a nutshell, buying the rumor and selling the news in forex trading involve a very simple process. The following tools will assist you in implementing this trading strategy:
Regardless of where you get your forex news, make sure that it is a legit news provider. There are several news platforms that provide quick and easy access to economic news, such as Yahoo Finance, Bloomberg, and Nasdaq.
The key economic events that occur in a country have a great deal of impact on the currency. Following an economic calendar makes it easier for a trader to gather relevant dates and information and judge the impact of economic events by tracking and summarizing such events for a variety of countries.
Copy Trade consists of following the trades of another trader (usually a friend or an expert). Copy trading strategies allow you to find and follow expert forex traders based on certain parameters that are important to you, including gain, location, and risk score.
Forex trading has gained a lot of attention over the years and is now more accessible than ever before, but many beginners still lose money in the hope of earning big profits. Here’s a detailed guide on How to get started with Forex Trading tailored specifically for beginners.
Which Currencies Should Be Your Focus?
Forex traders have access to at least eight major currencies at most forex brokers, which means that economic data is always available for them to use as a basis for making informed trades. The eight most-followed countries release seven or more pieces of data almost every day (except holidays). Consequently, for those who choose to trade news, there are plenty of opportunities.
The following are the eight major currencies forex traders should be familiar with:
1. U.S. dollar (USD)
2. Euro (EUR)
3. British pound (GBP)
4. Japanese yen (JPY)
5. Swiss franc (CHF)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)
The eight major currencies are divided into several liquid currency pairs:
Tradeable currencies are available around the world. However, the U.S. dollar is on the “other side” of 90% of all currency trades, so U.S. economic releases tend to have the most significant impact on forex trading markets. By selecting the currencies and economic releases you are particularly interested in, you can customize your trading strategy effectively.
How “long” an impact does news have on Forex market?
There is no explanation for it. It is impossible to define a timeframe. All of it depends on how liquidity interacts with order flow.
Researchers Martin D. D. Evans and Richard K. Lyons found that the market could continue to absorb or react to news releases even after numbers are released. It was found that the effect on returns generally occurs on the first or second day, but the impact lasts until the fourth day. Meanwhile, on the third day and on the fourth day, there is still a significant impact on the flow of buy and sell orders.
Step-by-step guide on how to buy the rumor and sell the news!
The ‘Buy the rumor, sell the News’ trading strategy differs from regular technical and fundamental trading strategies in that it is essentially event-driven. Here’s how to take advantage of opportunities when relevant economic data and information make headlines.
- Open a trading account. You must open a forex account with an online broker who will assist you in meeting your goals and prioritizing your investment’s safety.
- Choose your preferred account type. You can choose between Standard, Cent, ECN, and Infinite Leverage accounts.
- Identify the event to be traded. Keep an eye out for upcoming news announcements that will have a high impact. Check out our economic calendar for upcoming events, which you can use to see what impact an upcoming news event is likely to have on the underlying currency.
- Find the best trading opportunity. When trading the news, it’s important to ensure you’re on the winning side. In other words, your trade corresponds with the move following the news release. Make sure you do your due diligence before buying or short-selling forex currencies.
- Make use of Technical Analysis. Watch out for the important technical characteristics of the underlying currency, regardless of the trading opportunity. Identify the prevailing trend before the release of the news, as well as important support and resistance levels that will serve as stop loss and profit targets.
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