Tuesday, March 26, 2013

What does “buy the rumor, sell the fact” mean?

The phrase “buy the rumor, sell the fact” is an old investing rule that applied to the stock market. In the past, if a person wanted to invest or trade stocks, he or she could only Buy or go Long on a company’s shares; there was no Sell side. Investors would “buy the rumor” when it had bullish connotations, and “sell the fact” if the rumor turned out untrue or bullish sentiment was less than perceived. The key to this rule is that the rumor must be bullish. If the rumor does not contain bearish connotations, I am certain you would not buy the company’s shares.

“Buy the rumor, sell the fact” does not quite apply to present financial markets, especially the Forex market. In Forex, you can Buy and you can Sell. So if you go Short (sell) on a currency pair, the rule would be “sell the rumor, buy the fact” on the basis that the rumor has bearish sentiment.

However, I always say “we do not predict, we react.” When you buy or sell a rumor, you predict what the market will do. After trading for many years, my experience is that the market can and will very often go against what you predict. We cannot control the market so why should we predict its movement? I prefer to let the market show me what it wants to do before deciding on when to enter and exit my trades. 

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