‘Buy the rumour, sell the news’ meaning
‘Buy the rumour, sell the news’ refers to the rise in price that occurs when an event is expected to take place in the future. Traders might choose to buy in the days or weeks before the event occurs, and close them when it’s confirmed, rather than waiting for the news to break.
That’s why you’ll often hear that markets have already ‘priced’ something in, meaning there’s no expectation for the event itself to be market moving. Traders who buy the announcement itself are often only providing liquidity for the rumour traders looking to close their positions.
The saying is only used to describe positive news – such as good earnings, elections resulting in more stable leadership or good macro data – that could cause the price of a security to rise in value. Traders are looking to identify an underpriced asset and take advantage of the upswing.
Do rumours affect the stock market?
Yes, rumours affect the stock market. For companies, the most anticipated events will be company earnings, management changes, political decisions and macroeconomic data.
For example, if a company’s earnings are coming up, you might see its share price rise in anticipation of high profits. If the announcement confirms the expectations, prices may reverse as buyers close their positions to take their profits.
However, the bigger market moves will come if the rumours were wrong, and markets are surprised. This can cause large numbers of traders to rush to close positions before they start to incur large losses.
Rumours can also impact other markets, such as currencies and commodities. You’d see the pattern emerge most in the forex market in expectation of an interest rate hike by central banks, and for commodities, fears of a financial crisis can cause a massive inflow of investment into gold and silver.
‘Buy the rumour, sell the news’ example
Let’s look at a ‘buy the rumour, sell the news’ example for forex.
The Bank of England is due to meet in a week, and rumours are building that suggests it is going to increase interest rates. When central banks raise rates, it points to a stronger economy which means the domestic currency is likely to increase in value.
This would mean that GBP will strengthen against other currencies it’s traded against. So, you decide to trade GBP/USD, opening a long position in anticipation that the pound will rise against the dollar.
In a week, the announcement is made that the Bank of England is raising rates, which pushes the pound's value higher. You’ve already taken your position, which means you can ride the wave and close your trade once the currency hits your profit target. At this point, you’ll ‘sell the news’.
How to ‘buy the rumour, sell the news’
The ‘buy the rumour, sell the news’ tactic is popular, creating a class of traders known as ‘news traders’ who buy and sell solely based on news and speculation.
To build the strategy, you need to:
- Understand your chosen market
- Keep an eye on economic calendars for upcoming events
- Have set price targets for both entry and exit
- Build a risk management strategy to minimise the impact of any adverse movements