What does it mean to buy the rumor, sell the fact? - Online Forex Mentor (2023)

Buy the rumor, sell the fact is an old trading adage akin to “the trend is your friend” and “don't trade with money you can't afford to lose”. While the meanings behind "the trend is your friend" and "don't trade money you can't afford to lose" are fairly obvious, "buy the rumor, sell the fact" is a bit more ambiguous and event related. we see them taking place quite often in the forex market.

Where did the rumor come from to sell the fact?

Buying the rumor instead of selling the fact is advice that came from traders who traded on the stock market many years ago.

It refers to a situation where the price of a stock would rise because traders are buying based on a rumor they heard about the company the stock represents.

The rumor could be something like the company is being acquired by another company or that the company's expected earnings are much higher than expected. Traders will see the rumor and start buying because they believe that the rumor will eventually turn out to be true and they will make a significant amount of money.

Well, the "sell the fact" part of the saying comes from how the rumor that got people to buy turned out to be false. The earnings for the company end up being negative instead of positive, causing people to start selling large amounts of shares as the share price is unlikely to go up now.

In the Forex market, "buy the rumor or sell the fact" is interpreted differently, mainly because rumors are not that common and the vast majority of traders will not place a trade based on the fact that they have heard a rumor.

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However, what traders will do is place a trade in anticipation of an upcoming news release.

Traders see press releases as a way to make a lot of money very quickly. You've probably seen how far the market moves when news like the NFP or FOMC breaks. Traders try to predict which way the news will move the market by looking at the forecast figure for the release.

Basically, they are buying the rumor, they are going to look at the forecast number, and they believe that the price will move in the direction that the forecast number suggests. When the news finally breaks, all traders are buying (or selling, depending on the forecast figure) and the price is moving in the direction indicated by the forecast figure.

Now the part of selling the facts comes into play.

The moment the news was released and traders placed their trades based on the forecast figure, the bank's traders figured out what the actual figure for the release means for the direction of the market and began to trade accordingly.

If the forecast number was good for a coin and many traders brought it in immediately after the news broke, bank traders will enter the market and make short trades. You've probably experienced this before if you've been watching the market during major news releases.

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The news will break, the price will make a big move in one direction before suddenly moving again in the opposite direction, which usually leaves a big wick in the candle.

These are people who buy the rumor and sell the fact. The move up you see as soon as the news breaks is basically people buying the rumor and the big move you see in the opposite direction soon after is people selling the fact.

It's important to realize that the quote "buy the rumour, sell the fact" can also be interspersed with "sell the rumour, buy the fact" if the buzz that gets people to sell is based on something that was done for price. of a coin is negative

An example of how to buy the rumor and sell the fact

Now let's take a look at a real market example of people buying on the rumor and then selling the fact.

Here we have a bearish headline that was formed due to the May 6 NFP release.

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What is immediately noticeable about this bearish pin is that it has a great wick. The wick tells us that at some point during the formation of the bearish pin, the market rallied greatly, only to fall back down near the open of the candle.

The question is what made people buy and then sell in such large quantities?

The answer is the traders who thought the NFP numbers would be negative for the USD.

If you look back on that day, you'll see that the forecast number for the NFP was 205,000, which was lower than the number published in the previous NFP report. This means that if the forecast figure turns out to be true, the EUR/USD rate should rise as the news is bad for the USD rate.

Just before the NFP is released, traders will look at the forecast number and see that it is likely to be worse than the previous release. They will prepare to use market orders as they expect the price to spike after the news is released.

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Once the NFP is released, all traders will buy and the price will rise to a large extent, not all traders will go long at the end of the bullish move that their buying generates, which usually causes the price to move step by step by step and you will see the glider pause and stay still for a second or two before making another big move.

The magnitude of the upward move caused by traders' buying is causing a large number of other traders to initiate long trades, sensing that the price will surely continue to rise.

By the time the market has gone up, the banks have decided that the NFP numbers are actually USD positive and that the EUR/USD market price should fall to reflect this.

Banks won't sell unless they know there is a way to make money. The only way to make money is if other people lose money. They know that if 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, causing the EUR/USD price to fall and the bank traders selling is pushing trades toward profit.

You can see that the EUR/USD price has fallen sharply since this NFP release was released, which means we know for a fact that bank traders were selling when the NFP was released.

The strange thing about this release is that the actual NFP number for the USD price was negative, as the forecast number suggests. So the rumor was true and the traders had made the right decision, but the price fell anyway because it is always the banks that dictate what the news numbers mean for the market.

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I hope this article has given you a better understanding of what it means to sell rumor to sell fact or sell rumor to buy fact. Unfortunately, this isn't really actionable advice as there is no way to know if banks will enter the market and buy or sell once a news event has been published.

Only after the news spreads do we know if the banks took any trading positions, which in itself can be helpful as it can give us a little indication of which direction the price is likely to move in the near future.


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