News trading strategy
The global financial markets are quick to absorb information that materially impacts the underlying assets. This means that the prevailin-g price for any asset is what the market judges to be its fair value based on the information available to all the participants. Naturally, this is also the case for currency pairs. Even then, some informed investors are able to profit off of certain speculative movements, and as trading is primarily a zero-sum game, there is a loss-making counterparty to those trades as well. If we had to provide an analogy to explain the position of both these parties, we could say that the informed investor bought the rumor and sold the news, while the loss-making counterparty just bought the news. This explains the essence of this strategy.
But it isn’t that simple to adopt and implement. There’s a lot of subjective judgment involved in executing this strategy. That’s why the TU examines the strategy in detail and will explain how it works, present some sample scenarios, offer useful resources, and give you a lot more that can help traders manage and profit from the strategy.
“Buy the rumor, sell the news” | What does it mean?
This is where everyone gets it wrong. Buying the rumor isn’t actually “buying based on rumors”. It essentially means anticipating important announcements beforehand and acting on them to make a profit. For instance, if you anticipate that the demand for crude oil is going to skyrocket in the coming months, while simultaneously, the supply of the Chinese Yuan would also increase in the international markets, you could go long on the USD/CNY currency pair before these events unfold. Some basic knowledge of economics tells us that both these events would lead to the appreciation of the USD against the CNY. Later, when these events actually take place, you’d be the one profiting from an early entry into the position. But why?
There’s a theory that talks about how the market reacts to surprises in information. When market participants receive information that isn’t already discounted in the price, abrupt movements in asset prices are quite normal, and this is exactly what the “buy the rumor, sell the news” strategy focuses on to make a profit on the trade. You enter into a position before the market has moved and you exit it just when it begins absorbing the new information. In this way, you are a step ahead of all those who are late and still trying to catch the rally.
Best Trading StrategiesHow the “buy the rumor, sell the news” Forex strategy works
Now that you understand the underlying idea behind this strategy, it's time to execute it. To “buy the rumor,” you’ll first need to know the rumor before the majority of the market.
There are two ways this can be done:
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You could perform a fundamental analysis on the currency pair of your choice and evaluate its future route;
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You could resort to low-latency news platforms that flash news with almost zero delays.
Once you obtain some relevant news or rationale, the next step is to analyze the risk/reward trade-off for the trade under consideration. An important point to note here is that regardless of the popularity of this strategy, in the end, it still falls into the category of speculation, and so, the risk involved here would be high. Forecasting the future always comes with some error on part of events not turning out the way you expect them to, so active consideration of the downside risk is extremely essential before executing this strategy.
Once the risks versus the rewards are considered, you’re ready to place the order and wait for your forecasted events to unfold. This then brings us to the tricky part: When to exit? The answer to this lies in understanding basic market psychology. Generally, uninformed investors tend to act upon the news, so when the news breaks, the profit-makers exit at the cost of such uninformed investors. This enables them to get the best exit price for their trade as the latecomers tend to flock to the other side of the transaction.
Trading psychology: how to achieve success“Buy the rumor, sell the news” | Scenarios
Here are a few practical examples that call for the application of this strategy:
Policy rate changes
The monetary policy stance (expansionary or restrictive) of a country’s central bank has a huge impact on its currency. So, ahead of a policy decision by the central bank, this strategy can be employed based on the expectations for the policy rate.
Fiscal status
The fiscal policy is the next big factor that impacts a country’s currency. Shifts in the government’s stance concerning the ideal terms of trade can be anticipated and acted upon to benefit from the shift in the market’s perspective of the riskiness of a country’s currency.
Key economic events
Information from events like announcement of industry data, GDP figures, jobs data, and so on, can be analyzed and forecasted beforehand in order to take advantage of the gap market has missed out on while discounting the asset prices.
Useful resources for news trading
Here are a few tools that will help you implement this strategy:
Forex news portals
Popular and established news platforms like ForexLive, DailyFX, and Forex Crunch, among others, can be referred to for quick and easy access to the latest news.
Best Forex Websites and Blogs For BeginnersEconomic calendar
Recall that a currency is highly impacted by key economic events that take place in the country. This tool tracks and sums up such events for a variety of countries, making it easier for a trader to gather relevant dates and information and judge the impact of economic events. It can also be used to back-test this strategy. You can access this calendar through this link
Social trading investment
This basically is a type of “copy trading” where you can follow the trades of someone else (generally a friend or an expert). One platform, eToro, has streamlined this process to a very considerable extent. On their platform, you can search for and filter out traders you want to follow based on certain parameters including gain, location, and risk score. It also has a social news feed where traders can share their trading ideas within the eToro community.
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FAQs
Is this strategy risky?
Yes, because it is primarily based on speculation.
Can I hold the trade even after the news has emerged?
It is generally not advisable to hold the trade in anticipation of additional profits after the news has emerged.
What is social trading?
Social trading follows or copies the trades of another (more experienced) person or group; or you can trade mutually in conjunction with others.
What is the best platform for social trading?
eToro is one of the most reputed platforms for social trading with a very user-friendly UI and many other beneficial features.
Glossary for novice traders
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Fundamental Analysis
Fundamental analysis is a method or tool that investors use that seeks to determine the intrinsic value of a security by examining economic and financial factors. It considers macroeconomic factors such as the state of the economy and industry conditions.
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2
CFD
CFD is a contract between an investor/trader and seller that demonstrates that the trader will need to pay the price difference between the current value of the asset and its value at the time of contract to the seller.
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3
Chinese Yuan
The yuan (CNY) is the official currency of the People's Republic of China. The yuan is divided into 10 jiao, which are further divided into 10 fen.
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Options trading
Options trading is a financial derivative strategy that involves the buying and selling of options contracts, which give traders the right (but not the obligation) to buy or sell an underlying asset at a specified price, known as the strike price, before or on a predetermined expiration date. There are two main types of options: call options, which allow the holder to buy the underlying asset, and put options, which allow the holder to sell the underlying asset.
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BaFin
BaFin is the Federal Financial Supervisory Authority of Germany. Along with the German Federal Bank and the Ministry of Finance, this government regulator ensures that licensees abide by eurozone laws.
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Team that worked on the article
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).