There is a saying – “buy the rumor, sell the fact”. You will hear people saying this in the news and especially in Forex market commentary, as it relates to FX markets very well.
Basically, what the phrase means is that when a news event is coming up, such as non-farm payrolls; the best trading strategy is often to open a trade in the opposite direction to what logic would insist.
This is because when the market already has an expectation, they often push the price in that direction well before the news is actually announced, and therefore they are capitalizing on these moves once the news has indeed been announced to everyone, and the expectation is no longer there.
Whilst there are indeed a few risks when it comes to this way of thinking, it pays to take a look at the idea of contrarian trading, so we will go in to a bit more depth with the idea in the next section.
Why Logical Trading Flies out the Window?
Many people often ask why traders throw out logic when it comes to News announcements. Indeed, it seems strange that a positive announcement would result in a negative move in the market.
However, the idea here is not that the News is “positive” or “negative” – but instead that it is above or below what was expected. If the data was worse than expected, you can often expect to see a largely negative effect on the market. This is clearly in line with logic.
Equally, if the data is much stronger than expected, you can expect to see a very positive reaction on the market. Don’t confuse the phrase with these two things. What we are really talking about when we refer to buy the rumor and sell the fact is when the data comes out exactly as expected. When this does happen, the market will often move negatively rather than positively.
This is a recognized phenomenon and something which you are able to take advantage of in your trading.
For example, let’s take the release of non-farm payrolls which are exactly as the market expected. We are trading the EUR/USD currency pair.
- Data is released exactly as expected at +200,000 jobs
- The market send the EUR/USD higher, which is actually a negative move for the USD
- Even though the data release is positive, the pre-existing expectation has already moved the price of the EUR/USD in the days leading up to the announcement
- EUR/USD therefore falls on the announcement of the information
- The opposite is true if you reverse the currencies. For example, if exactly the same thing happened for the Eurozone, it would likely be that the EUR/USD would move lower as a result of the buy the rumor and sell the fact logic.