(Chart courtesy of TrendSpider.com)
The old Wall Street saying “Buy the rumor, sell the news” means that the best opportunity to profit from a news event is to buy into a chart early when the news is not yet priced in as it is still a potential rumor. The second part of the saying means that the best time to lock in profits is to sell as the news event becomes widely known.
The best risk/reward ratio is early before the news becomes completely priced into the chart, the reward is diminished as everyone knows about the news and has a chance to buy into the chart.
A typical “Buy the rumor, sell the news” chart shows a trend beginning as a rumor of news begins with the top happening near the time the news event goes live. The news event is sold into and profits are taken for people following the advice of this saying.
This saying applies to a known and expected future news event. It doesn’t apply to sudden surprise news events like a terrorist attack, a natural disaster, unexpected monetary policy decision, or a black swan.
When there is a rumor priced into a chart there is money to be made, when the event is on the mainstream news it is time to sell. The advice is to buy early in a news cycle and sell into the event itself for maximum profits.
The recent DogeCoin chart is one example of this cycle as the run up started when Elon Musk first tweeted about DogeCoin on April 14th 2021 starting rumors and ended as Elon went live on Saturday Night Live on May 8th 2021 the news ran its full course.