Buy The Rumor, Sell The News!!!
Living in the Information Age, makes information way more accessible and it also means it is easy for anyone to put out news! Whether that information is credible or not is an entirely different story. Probably the most important thing to consider is the reliability of stories before making any investment decisions.
Incorrect information can disrupt an entire portfolio!! This is where the saying “buy the rumor, sell the news” comes into play, especially when you don’t know what you are doing as a new Forex Trader.
So what does this saying mean?
Ideally, this saying comes from the hype or anticipation caused on Wall Street or any other financial hubs around the world. What tends to happen is that before major events analysts, economists, traders, and others speculate as to what they THINK will occur or better yet what they think is ACCURATE but just may prove not to be so…
Now, I have a question for you! Have you ever found yourself trading the news event and though the data that came out was positive and was “MEANT” to strengthen a certain currency? Or you figured that a certain currency would somewhat be devalued but it wasn’t??? INSTEAD! It increased in value for quite a while and THEN tanked!
For this reason, some Forex traders hate trading news events because the uncertainty in results is high, and no one risks without knowing if there is a probable return!
Now back to what happens when anticipation occurs on Wall Street, investors and traders try to be a part of the action so they don’t miss anything. FOMO! And so although the news event is approaching, traders are already getting into buy positions based on what they have HEARD and not what they have SEEN!! This is a key distinction when taking this phrase into account.
Now seeing that buys are already happening and price is bullish, when the news is released logically you would expect the trend to follow because the market looks BULLISH! But! That unfortunately is not the case, the news triggers a sell-off hotter than chili. All the way to the bottom.
This is not logical and you may ask why on earth that would happen? It has to do with sentiment and bias on the currency pair.
To further explain this reason – when the investment bankers believe they have pushed price high enough they will take all the money they’ve made and go the opposite direction, to collect money for retail traders thinking the bullish momentum is still in play (they lack the patience to wait for a retracement or pullback).
What do we do as traders??
Stay away! Rather be sure than be hopeful. Be sure that your soldiers (capital) will return from battle instead of hoping that it will be the case.
And if you are sure, then act accordingly – but don’t get greedy. Trade what you see… not what you think. Follow the reports and market sentiment rather than wishful thinking.
Enjoy staying away from the markets and away from bad trades!
Happy trading Traders!