A Guide on Buying the Rumors and Selling the News

Source: Forex News

In November 2016, the US citizens
went to elect their next president. Before the vote, polls had predicted that Hillary
Clinton would win the majority vote and the electoral college. As such, the US
stocks always moved up when polls of her victory came out. When the elections
came, the results shocked many people and US futures dropped sharply. However,
when the markets opened on November 9, stocks started to rally. This rally has
continued to this day.

In June 2016, when the UK went to
vote, many people expected the remain side to win by a large margin. However,
when the results came out, the leave had won by a healthy margin. This led to a
sharp decline of the sterling and UK stocks but days later, a short-term rally
emerged. While the sterling has remained lower than before the vote, it has
recovered most of the losses it suffered.

Yesterday, when the members of
the UK parliament voted against a no-deal Brexit, the sterling rose. This
happened as traders cheered that a worst-case scenario was now off the table.
Minutes later, the sterling started to pare those gains and is still declining.
This happened as traders started to price-in an extension of uncertainty in the
country.

If you are a closer watcher of
the financial markets, you must have observed this situation. This is where the
markets tend to move opposite of the news. It also happened last year when the
US released better than expected jobs numbers, leading to a sharp decline in
stocks.

This situation is usually known
as buy the news, sell the rumors. In
other words, traders tend to be very optimistic ahead of key releases. As a
result, they buy in advance. If their scenario works out fine, they exit,
leading to the declining of the assets. This usually catches novice traders by
surprise because they expect good news to lead to higher results. It is not
uncommon for traders to buy the dollar when inflation rises and jobs numbers
beat expectations.

The buy the news, sell rumors scenario is seen almost every day in the
financial markets. It happens when a data is released in the economic calendar,
when a company releases its earnings, when a major political event happens, and
when there is a major environmental event. For example, in last year’s
hurricane season, US stocks rose instead of falling. To novice traders, the
hurricanes was a bad thing that would lead to lower stocks. Experienced traders
for their part had already priced-in the hurricanes and didn’t expect them to
have major implications on earnings.

Therefore, as a trader who follows the news, it is very important for you to understand this concept. It may help you make smarter investments will others don’t. It may also help you anticipate the price action that happens when news or data is released.


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