Definition – What does Cockroach Theory mean?
The cockroach theory is a market theory that states that bad news tends to be released in bunches. This causes traders to consider one piece of bad economic news as a harbinger of more to come – just like a homeowner finding one cockroach in the sink is certain that there are more elsewhere.
ForexTerms explains Cockroach Theory
There are a few ideas as to why the cockroach theory holds up. One is that when a country has been trying to keep problems quiet and fails, it has to release all its bad news to prepare the markets for the coming shock and explain why it is happening. The increase in people watching announcements for clues has also made it much harder to keep economic struggles from becoming headlines. There is, however, also a simpler explanation: bad news is released all the time, but people only pay attention and remember it when there is large concentration.