Buying the rumour before the data

[Fairman]

Buying the rumour before the data

Markets often move in the hours before a scheduled event as traders position. The direction usually reflects the consensus expectation, and the move can be significant.

When the news arrives and matches expectations, price often reverses, as those who positioned take profit. The "buy the rumour, sell the news" pattern is a staple of trading folklore.

It is not reliable. Sometimes the news confirms the expectation and the market keeps going. Sometimes the expectation was wrong and the position unwinds violently.

For a scalper, the more interesting question is what pre-news positioning does to liquidity. A market that has drifted a long way in one direction before data is a market with a lot of crowded stops and trapped positions, and the news can trigger a fast unwind.

Watching how price behaves into the release, rather than just reading the forecast, gives clues. A steady one-way drift with narrow ranges suggests heavy positioning, and the reaction can be sharp in either direction.

A practical test: log the price drift in the six hours before each major release, then the move in the first ten minutes after. Over a year, the relationship between the two says whether fading pre-news drift was a good idea for the pair.

How has price tended to behave in the hours before major events, and does it predict anything?