Buy the Rumour, Sell the News: Trading Strategy in Forex and Crypto

FXOpen

Navigating the volatile terrain of forex and cryptocurrency markets demands a strategic edge, one that ‘buy the rumour, sell the news’ can offer. This method, rooted in market psychology, plays on the anticipatory reactions of traders to unconfirmed information about significant events.

In this FXOpen article, we explore this strategy, break down how to implement it, and look at an in-depth example.

Understanding the Buy the Rumour, Sell the News Trading Strategy

The concept of ‘buy the rumour, sell the news’ is a well-known approach in forex and cryptocurrency markets, encapsulating how traders act on information before it becomes public. This strategy revolves around the anticipation of events or developments that can significantly impact market prices.

Essentially, it involves trading assets based on unconfirmed information or 'rumours' about upcoming events that are expected to have a given positive or negative effect on the asset's value. The logic is to trade while prices are still reacting to speculation, with the aim of potentially closing the position after the news breaks and the market reacts, typically when prices peak momentarily.

The essence of this strategy lies in understanding market psychology and how speculation can drive prices. Traders often monitor various channels for hints of developments that could influence asset prices, such as policy changes, economic indicators, or other announcements in the forex and cryptocurrency sectors.

Once the anticipated news is officially released and the initial market reaction occurs, it's common for prices to stabilise or even reverse as traders lock in their returns, having capitalised on the price movement generated by the speculation.

Steps to Buy the Rumour and Sell the News

In forex and crypto markets, the strategy of "buy the rumour, sell the news" doesn't come with a set playbook of entry and exit points. This is because the strategy hinges on market dynamics and sentiment, which are inherently difficult to analyse. However, traders can follow certain steps to better position themselves to take advantage of this phenomenon.

Identifying an Important Market Event

The first step is pinpointing an upcoming event that could significantly sway market prices. This involves focusing on events that are of paramount importance to the market, not just any minor news release. When it comes to ‘buy the rumour, sell the news’, examples may include:

  • Interest rate announcements by central banks
  • Release of major economic indicators (GDP, Non-Farm Payrolls, unemployment rates, inflation data, etc.)
  • Policy changes or economic forecasts by governments or financial institutions
  • Geopolitical developments
  • One-off events (e.g. COVID-19)

The relevance of an event can vary; for instance, inflation data might be more crucial in times of high inflation vs. when the economy is grappling with slowed GDP growth.

Likewise, it’s important to consider timing; significant events often lead to market movements in the days and weeks before the official announcement as traders assimilate and act on relevant economic data. On the other hand, an event with moderate importance, like PMIs, may see traders only begin to accumulate a position on the day of the event.

While these economic events can be important in ‘buy the rumour, sell the news’ cryptocurrency strategies, given that many are paired against the US dollar, crypto is typically influenced more by idiosyncratic events. Examples of rumours include:

  • Bitcoin ETFs
  • Bitcoin halvings
  • Network upgrades
  • Adoption/integration with mainstream finance or platforms
  • Hacks
  • ‘Whale’ activity

Forming a Directional Bias

After identifying an event, the next step involves forming a directional bias. This typically requires analysing:

  • Related economic data and trends
  • Consensus expectations
  • Analyst reports
  • Market sentiment and positioning indicators, like Myfxbook's sentiment analysis, the Crypto Fear and Greed Index, or the Commitment of Traders reports

In doing so, traders can align themselves with the prevailing market sentiment.

Analysing the Market Trend

Determining the prevailing market trend is crucial and is done with respect to the timeframe and context of the expected event. For short-term events, examining trends on 1-hour to daily charts may be best. Real-time price data, from 1-minute to monthly timeframes, can be found in FXOpen’s free TickTrader platform. The alignment of current price trends with market expectations can signal a good opportunity to position oneself in anticipation of the event.

For example, if the consensus leans towards the Federal Reserve hiking interest rates due to high inflation and low unemployment, and this expectation is reflected in a strengthening USD, traders might find an opportune moment to position themselves accordingly. Technical analysis can similarly aid in pinpointing a precise entry point.

Managing the Position

With a position taken based on the anticipated event, the trader then looks to the market's reaction to carry the trade in the desired direction.

As for exiting the position, one approach could be to do so just before the news breaks, pre-empting a potential reversal as the market digests the news. This strategy banks on the assumption that many traders will act similarly, leading to a swift change in market direction.

An alternative approach involves trailing a stop loss, which could be activated by the increased volatility surrounding the news announcement. This method holds potential for gains if the news contains unexpected details that further fuel the initial market reaction, such as a more significant rate hike by the Federal Reserve or more hawkish language than previously anticipated.

Forex Case Study: Bank of Japan Hikes Interest Rates

Japan's economic landscape has historically been characterised by persistent low inflation, which regularly fell below its 2% target since the 1990s. This led to the Bank of Japan (BOJ) adopting a low interest rate, with rates dropping to 0% since late 2010 and -0.1% since 2016, aiming to sustainably push inflation back to 2%.

Post-2008, many central banks maintained low interest rates. However, as inflation began to rise after the COVID-19 pandemic, most started a hawkish monetary policy. The United States, for instance, responded to record domestic inflation by raising interest rates to 5.5%. However, Japan was an outlier, maintaining its -0.1% rate. This led to a strong rally in the USD/JPY currency pair.

The narrative around an exit from negative interest rates had been growing in 2024. However, the rumour hadn’t yet been credible enough to see the yen strengthen. This began to shift in late February 2024, with some suggesting the BOJ was reconsidering its prolonged negative monetary policy.

On February 29th, BOJ board member Hajime Takata hinted at a potential policy shift away from negative interest rates, emphasising the central bank's attention on inflation and wage renegotiations as a determinant for exiting its accommodative stance. This statement initiated a notable decline in the USD/JPY rate.

Further fueling expectations, core inflation data released on March 5th showed a 2.5% year-over-year increase. On March 8th, Japanese media outlet Jiji reported that the BOJ was considering scrapping its expansionary yield curve control program. According to Bloomberg, this led to market-implied odds of a BOJ rate hike surging from 26% at February's end to 67%.

On March 13th, Nikkei, another reputed Japanese outlet, reported that the BOJ decision would come down to annual wage negotiation outcomes, which were due later in the week on the 15th.

Despite the growing anticipation of a rate hike, the market's reaction was nuanced; USD/JPY began to rise prior to Nikkei’s report. After all, the expected shift from -0.1% to 0% interest rates would only slightly alter the significant interest rate differential with the US, maintaining a bullish outlook for USD/JPY.

When wage negotiations concluded with a 5.28% increase on March 15th, a rate hike on March 19th became almost certain. USD/JPY had climbed from a low of 146.478 on March 8th to open the week on March 17th at 149.011.

The meeting on March 19th saw the BOJ raise rates to 0%, as widely expected. Anyone still having long positions in JPY closed their position, and USD/JPY climbed significantly higher, reaching 151.816 just a day later.

Buy the Rumour, Sell the News Meaning in This Scenario

This case exemplifies the ‘buy the rumour, sell the news’ strategy's complexity. Initially, the yen strengthened on speculation and uncertainty surrounding the BOJ's policy shift. However, as the market began to realise a rate hike was a significant possibility, two pivotal developments occurred.

  • First, the certainty of a policy change grew. While there were a few unknown events, like the wage negotiations, the market massively increased its expectation for a hike in the week prior to the meeting, as evidenced by Bloomberg’s reporting.

    In hindsight, the anticipation of the end of yield curve control may have been the ‘news’ event that all but confirmed the hike for the market, leading to the rise in interest rates being priced in completely.

  • Second, traders recognised that the actual impact of the hike would be minimal on the fundamental USD/JPY relationship, given the still substantial interest rate differential of 5.5% vs the previous 5.6%.

This scenario underscores the importance of considering the broader context and market expectations surrounding news events. While economic data releases tend to be more uncertain and may not be fully priced in, some events may offer strong clues well before the actual announcement.

If the outcome of an event becomes all but a certainty thanks to these clues, the rumour may no longer be valid, leading to it being priced in as news. At this point, a trader could take an opposite ‘buy the news, sell the rumours’ approach, potentially capitalising on the market's expectation that this shift in fundamentals has already been baked into the price.

The Bottom Line

In a realm where information is king, mastering the "buy the rumour, sell the news" strategy could offer traders a competitive advantage in forex and cryptocurrency markets. This approach not only demands an acute sense of market sentiment and trends but also a disciplined approach to risk management.

For those looking to navigate these waters with an experienced partner, opening an FXOpen account could be your gateway to informed and strategic trading in the dynamic world of forex and crypto CFDs.

FAQs

What Does It Mean to Buy the Rumour, Sell the News?

‘Buy the rumour, sell the news’ is a trading strategy in which traders buy or sell before an anticipated event and close trades once the event occurs or the news is released. Traders capitalise on price movements driven by rumours or speculation prior to the official announcement, then close position to lock in potential returns as the market reacts to the news, which may already be reflected in the price.

How to Buy the Rumour and Sell the News?

Traders can implement this strategy by staying informed about upcoming events that could impact market prices, such as economic announcements. Monitoring market sentiment and trends helps in forming a directional bias. Traders position themselves based on speculative anticipation, planning to exit their positions when the news breaks and the market adjusts.

Should I Trade Based on the News?

Trading on the news can be a viable strategy, especially for those adept at interpreting market sentiment and reactions to news events. However, it requires an understanding of how news impacts different markets and the ability to act swiftly on information. Risk management and a clear strategy are crucial, as markets can be highly volatile following news releases.

At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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