How to trade rumored
Fundamental analysis theory says: use two strategies in news trading. Before the statistics are published, place pending orders in both directions at long distances and delete the failed one. Or, enter the market as soon as possible after the news is released in the direction of the trend movement. Practice, however, strongly discourages working by these rules. It’s all about rumors.
Even before the news is officially released, traders are stepping up trading based on what they read in the media or forums. It’s a paradox, but exactly at the moment of publication of the news, the price of the instrument is at its extreme. Professionals have already incorporated the potential result into the current price. And while newbies are trying to react to the official publication at the moment, professionals open deals in the opposite direction. This explains the volatility, which confirms the lack of unanimity in the ranks of traders.
Rumor trading: pros and cons
Rumor trading is one of the areas of fundamental analysis, in which the analysis and decision-making is carried out based on a forecast or rumors, as well as on the basis of an assessment of the likelihood of a positive outcome of an event.
Example. Company A plans to publish its quarterly report on April 1. According to analysts’ forecasts, net profit growth will amount to 3%. Further, two scenarios are possible:
- Trading on the news. The trader is waiting for the official publication of statistics and makes a decision. If the growth is only 1%, the trader bets on the fall in the share price, 5% – on the rise.
- Rumor trading. Based on rumors, the trader concludes that growth will still be at the level of more than 3%. He buys shares in advance and if the majority does so, then by the time the news is released, the share price will be at a maximum. As soon as official information appears in the media about the growth of net profit of 5%, traders begin to get rid of securities and unlucky newcomers from the previous group become buyers. That is, while an inexperienced mass is buying up papers at the peak, professionals are already selling them.
The advantage of the first option is less risk, because the trader already sees the official statistics, while in the second case, it is necessary not only to make a decision, but also to assess the probability of an event. However, not everything is so bad. In rumored trading, a trader can make money by going in the direction of the majority, and in case of an error, he can always close the deal with a minimum profit.
The benefits of rumored trading:
- Proactive trading. There is an opportunity to enter the market at the most attractive price.
- More room for analysis and experimentation. No scalping, there is time to make a decision.
Disadvantages of Rumored Trading:
- Rumors are used as manipulations. They are deliberately released to the masses in order to form the desired opinion in favor of insiders. For example, knowing about a 5% increase in net profit, insiders spread rumors about potential losses. Then they buy up shares at the lowest price and sell them at their peak after the statistics are released.
- It is not always possible to objectively assess rumors. Information can be presented in such a way that it can be interpreted in two ways. The possibility remains that some moment will be missed or underestimated. For example, a trader will focus on the analysis of financial indicators and will not pay attention to news and sales problems in a certain region.
- Increased risks. If the forecast is wrong, the trader may suffer a loss on panic.
Trading on the news makes sense only in the first minutes, provided that the trader is ready to withstand volatility. Rumor trading is a more acceptable option for novice traders who are ready to practice fundamental analysis.