The phrase “buy the rumor, sell the news” depicts a regular occurrence in the financial markets. Traders may transform this concept into a trading strategy based on their expectations for the future.
Suppose a trader anticipates that a future economic report or global event will influence the price of their asset in a particular way. When a trader purchases an asset based on this hunch, the strategy is in the rumor phase. Once the event has taken place or the report has been published, the news is made public. Traders then liquidate their positions, causing market movement.
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This method encourages investors to search for undervalued markets. When possible news or information implies that an asset may generate additional future cash flows, or rise in value (price), this is a rumor. It is believed that the asset’s value will increase in the next weeks or months. Investors will purchase this asset until it is no longer undervalued.