By Matt McCallJul 26, 2017
If I had a nickel for every time I came across an investment strategy that claimed to know how to trade earnings I would be a very wealthy man. Unfortunately I’m not swimming in nickels, and the folks who followed the advice of the so-called experts are likely on the lookout for some extra cash.
When it comes to trading around earnings – by that I mean buying a stock right ahead of its report because you think you know what will happen – the only true statement is that it is pure gambling. Unless you have some sort of insider information – which you’re not allowed to trade on anyway – there is no way of truly knowing what the actual numbers will be. And it’s even more difficult to predict how investors will react to the report and management’s guidance. One comment on the conference call can mess up the short-term reaction, so just because everything looks bullish on paper doesn’t guarantee that a stock will climb, and vice versa.
All that said, we are not stopping our trading during earnings season. You didn’t think we would, right? I’m here to help you weather the earnings cycle storms and avoid bad decisions.
There are two ways I look to make money when it comes to trading during earnings season. First, I will often lock in gains ahead of an announcement if there is a real risk that a winner could turn into a loser. I use history to my advantage here. If a stock typically trades well in the week following the report, I may consider holding it through the numbers. Keep in mind, though, that this is completely different from buying a stock right ahead of earnings in anticipation of it moving higher on the results. That’s where it turns into gambling instead of investing.
The second way I trade earnings season is by watching how a stock reacts after its report, as it may create a buying opportunity on either a strong breakout or a pullback to support.
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