How to Buy Stocks on the Rumor, Sell on the News - dummies

How to Buy Stocks on the Rumor, Sell on the News

Buy on the rumor, sell on the news is a primary cause of technical price developments, and in many instances, the only “technical analysis” that commentators mention. When you “buy on the rumor” and then “sell on the news,” you stand to make a nice profit on your stocks:

  • Market stock traders buy on the rumor, meaning that they treat forecasts prepared by economists and analysts as though the event had already happened precisely as predicted. In other words, they “build in” the forecast to the price, creating the very high on the price bar that the news is supposed to produce.

  • To sell on the news relates to the event itself. You sometimes get the seeming paradox of a price reaching a new high before the event and falling lower immediately after the event, even when the news matches the forecast. The lower price comes about because the early birds take profit on the up move that they themselves engineered. The new low is usually short lived. After all, the forecast was for good news and the good news occurred, so the news was properly built in and the new high is the appropriate price.

If the news is much better than forecast, though, traders don’t take profit because better-than-expected news draws in new players and sends the price higher still. Then the early birds are positioned to make even better profits. If the news fails to match expectations, traders and investors alike sell, and the dip may turn into a longer-lasting price drop.

Either way, to buy on the rumor pays off for the short-term trader who keeps her finger on the trigger. Evaluating forecasts and being mentally ready to buy or sell at the moment of impact of the news is a difficult and risky business. It’s no wonder risk-averse traders get out of the market altogether around scheduled event dates.