Buy the rumor sell the fact is an old trading adage in a similar vein to things like “the trend is your friend” and “don’t trade with money you can’t afford to lose”. Whilst the meanings behind “the trend is your friend and “don’t trade with money you can’t afford to lose” are pretty obvious, “buy the rumor sell the fact” is a little more ambiguous, and relates to an event which we see take place quite frequently in the forex market.
Where Does Buy The Rumor Sell The Fact Come From ?
Buying the rumor selling the fact is a piece of advice which came from traders who traded in the stock market many years ago.
It relates to a situation where the price of a stock would move higher due to traders buying because of a rumor they have heard about the company which the stock represents.
The rumor could be something like the company being taken over by another company or the earnings of the company are expected to be much higher than anticipated. Traders will see the rumor and begin buying under the impression that the rumor will eventually turn out to be true and they will make a significant amount of money.
Now the “sell the fact” part of the saying comes from the way the rumor which has been causing people to buy turns out to be untrue. The earnings for the company end up being negative instead of being positive which causes people to begin selling large quantities of stock as its unlikely for the stock price to now increase.
In the forex market, “buying the rumor selling the fact” is interpreted differently, mainly because rumors are not as common and the vast majority of traders will not place a trade based on the fact they have heard a rumor.
However what traders will do is place a trade in anticipation of an upcoming news release.
Traders see news releases as a way of making a lot of money very quickly, you’ve probably seen how big a distance the market moves when things like the NFP or FOMC news comes out. Traders try to predict which direction the news is going to cause the market to move by analyzing what the forecasted number is for the release.
This is them basically buying the rumor, they’ll look at the forecast number and think the price is going to move in the direction the forecasted number suggests. When the news is finally released all the traders buy ( or sell depending on the forecasted number ) and the price moves in the direction the forecasted number indicated.
Now the “selling the fact” part comes into play.
By the time the news has been released and the traders have placed their trades based on the forecasted number, bank traders have figured out what the actual number for the release means for the market direction and have begun placing trades accordingly.
If the forecasted number was good for a currency and lots of traders brought as soon as the news was released, bank traders will come into the market and place sell trades. You’ve probably seen this happen before if you have watched the market during big news releases.
The news will come out, the price will make a large move in one direction before suddenly moving back in the opposite direction which usually leaves a large wick on the candlestick.
This is people buying the rumor selling the fact. The move up you see as soon as the news comes out is essentially people buying the rumor and the large move you see in the opposite direction soon after is people selling the fact.
It’s important to know the “buying the rumor selling the fact” quote can also be interpenetrated as “selling the rumor buying the fact” if the rumor which is causing people to sell is based on something which is negative for the price of a currency.
An Example Of Buying The Rumor Selling The Fact
Now we’ll take a look at a real market example of people buying on the rumor and then selling the fact.
Here we have a bearish pin bar which formed due to the NFP release on the 6th of May.
What’s immediately obvious from this bearish pin is it has a large wick. The wick tells us at some point during the formation of the bearish pin, the market moved up by a large amount only to fall back down near to where the candle opened.
The question is, what caused people to buy and then sell in such a large amount ?
The answer is the traders who thought the NFP numbers were going to be negative for USD.
If you look back to that day you’ll see the forecasted number for the NFP was 205,000 which was lower than the figure which came out on the previous NFP report. This means if the forecasted number turns out be true, the price of EUR/USD should rise because the news is bad for the price of USD.
Just before the NFP is released, traders will look at the forecasted number and see that it’s expected to come out worse than the previous release, they’ll get ready to buy using market orders as its their expectation the price will shoot up upon the news being released.
As soon as the NFP is released all the traders buy and the price increases by a large amount, not all traders will be entered into long trades at the bottom of the move up their buying creates, what typically tend to happen is the price will move up in stages and you’ll see the candle pause and stall for a second or two before making another big move.
The size of the move up caused by the traders buying, makes large numbers of other traders enter buy trades because they feel like the price is certain to continue higher.
By the time the market has moved up a large distance the banks have decided the figures for the NFP are actually positive for USD and the market price for EUR/USD should decrease to reflect this.
The banks will not sell unless they know there is an opportunity to make money, the only way for them to make money is if other people lose money. They know when they place their sell trades the price will fall and all the traders who placed buy trades when the NFP came out will be forced to close their trades at a loss, making the price of EUR/USD decline and pushing the bank traders sell trades into profit.
You can see in the time since this NFP release came out the price of EUR/USD has decreased dramatically meaning we know for sure the bank traders placed sell trades when the NFP was released.
The weird thing about this release is the actual number for the NFP was negative for the price of USD like the forecasted number suggested. So really the rumor was right and the traders had actually made the correct decision, yet the price still fell because it’s the banks who always dictate what the figures from the news event means for the market.
I hope with this article I have given you a better understanding of what buying the rumor selling the fact or selling the rumor buying the fact means. Unfortunately it isn’t really any actionable piece of advice because there isn’t any way to determine if the banks are going to come into the market and buy or sell when a news event has been released.
Its only after the news has come out do we know if the banks have entered trading positions which in itself can still be helpful as it can give us a little bit of a hint at which direction the price is likely to move in the near future.