How to trade earnings reports?
- Thread starter thatSAMazing
- Start date
No good. Better off just going with calls.
That's not really true. A stock can handily beat estimates and still dump. It really just depends on what the "expectations" were. You say that RIMM was "widely expected to move on the report"? That in and of itself should be a red flag. If it is expected to beat earnings, don't you think most players would already be in the stock? All you'd be doing is providing an exit to those grabbing their profits on the excellent news.
Most of the people who are warning you are speaking from experience.
Trading on earnings reports which tend to be among the news items that move the stock the most (barring force majeure, bankruptcy etc) carries more risk than trading fundamentals and trends.
You as a retail investor will never be fast enough to react to earnings news. By the time your human eyes digest the eps and whisper numbers, a dozen (? hundreds) tradebot's are already moving in or out of the stock.
Some here like the volatility it creates and trade the volatility and less the underlying.
Me? I learned my lesson, and have learned to enjoy the game of Craps at the Venetian.
You missed out of 5 points on RIMM, but perhaps you had bought it and it drifted lower because everyone "bought the Rumor and now were selling the news"
Its fairly difficult to get a handle on how the "street" will react to earnings x.xx vs y.yy eps. I've seen blowout earnings be flat and flat earnings blowout because of the ceo's "future outlook comments".
Good luck and happy trading!
11Blade
There is no god way to trade the news.
Because the news do not impact anything.
The traders and big money conrol the stock. Hence, it is impossible to predict what they will do. Of course if you know someone in a hige investing firm/hedge fund tha this another story.
Because the news do not impact anything.
The traders and big money conrol the stock. Hence, it is impossible to predict what they will do. Of course if you know someone in a hige investing firm/hedge fund tha this another story.
TRUST ME, you will lose everything. trading into earnings is just plain foolish and anyone that says otherwise knows nothing about trading. I trade after the news comes out. Here is what I do.
i look at the expectations and guidence,i then look at various support and resistance levels on the chart as well as see what kind of moves this particular stock is capable of making.
when the news does come out,i go over the press release with a fine tooth comb.how much did they beat by,did the raise next quarter and full year? did the stock already run up anticipating this report? were the margins in line? how bout backlog? what did the ceo say in the press release? did they raise guidence and then 5 minutes later announce a secondary offering(that sucks when that happens)? i let the stock settle down a bit and then jump in with a bid if all my criteria is met. listening to the conference call is smart as well,this way you can get a feel of what the analyst's think and perhaps pending upgrades.even with this type of strstegy you will be dealing with buying a gap up so you really have to know what you are doing. i have become very adeprt at this sort of trading and it can be extremely dangerous for those that are not veteran traders.
again.NEVER BUY OR SHORT BEFORE A REPORT COMES OUT and never buy based on the headline number,let the stock settle down and read the press release.
i look at the expectations and guidence,i then look at various support and resistance levels on the chart as well as see what kind of moves this particular stock is capable of making.
when the news does come out,i go over the press release with a fine tooth comb.how much did they beat by,did the raise next quarter and full year? did the stock already run up anticipating this report? were the margins in line? how bout backlog? what did the ceo say in the press release? did they raise guidence and then 5 minutes later announce a secondary offering(that sucks when that happens)? i let the stock settle down a bit and then jump in with a bid if all my criteria is met. listening to the conference call is smart as well,this way you can get a feel of what the analyst's think and perhaps pending upgrades.even with this type of strstegy you will be dealing with buying a gap up so you really have to know what you are doing. i have become very adeprt at this sort of trading and it can be extremely dangerous for those that are not veteran traders.
again.NEVER BUY OR SHORT BEFORE A REPORT COMES OUT and never buy based on the headline number,let the stock settle down and read the press release.
Trust me you can make lots of money trading earnings. It all depends on your time frames. Most of the replies here are talking about trading earnings for a day trade. Their experience and perspective is limited by the time frame they trade.
Each quarter when companies report their earnings, there are usually a handful of companies whose earnings are either surprisingly good, or shockingly bad. You can immediately recognize these companies by the post earnings announcement jump or plunge in their respective stock prices.
Now the implication of this is not for short term traders but for long term traders. If you look at the stocks which had surprisingly good or bad earnings three quarter down the line you will notice that the stocks that had positive earnings surprises continued to go up, on average. Similarly stocks which had significantly negative earnings surprise continue to go down for next three quarters.
Academics call this PEAD. The stocks with earnings surprises exhibit post earnings announcement drift, or PEAD for short. This PEAD effect was first identified in a paper published in 1968, almost 40 years ago. Since then numerous studies have shown this effect continues across world markets.
Now there are number of ways to trade earnings if you understand this. Buying stock post earnings is one way. In this case the event risk is out of way . If the stock was not rallying in to earnings or if this was first or second major earnings acceleration, you can enter on day or earnings and hold it till next earnings season or two. I have traded this strategy for last 7-8 years with very good results. It takes 2-3 earnings season fr most new traders to master. So if you are a longer term trader trading earnings is very profitable.
So if you are looking for a profitable strategy to trade, you might be interested in putting together a working plan for this earning season.
* Earnings Data Sources: You need a reliable source for earnings. I use the Investors Business Daily and Wall Street Journal for this. Besides these two there are many other sources of earnings. When choosing a source I look at how they adjust earnings for one time events. Overall IBD does a better job on this.
* Three types of earnings announcements: Earnings announcements are made after close, before close and in some rare set of companies during market hours. I concentrate on the earnings announced after market close. They appear in the IBD daily edition under 'Company Earnings Report' section.
* What to look for in earnings: To narrow the set of companies to track and trade for this strategy, based on my prior experience, I only track companies whose earnings are up 100% or more quarter over quarter and the earnings should be at least 5 cents. Sales/revenue should be up 5% or more. Doubling of earnings is significant. Few companies meet that criteria. So I put all the stock meeting this criteria in a list. Now what one is looking for is earnings acceleration. IBD will have those stocks with up arrow to indicate earnings acceleration. Besides that I look for price action on that stock by looking at how much they are up in last 65 days or so(stocks up less than 25% in 65 days prior to earnings do best). I am looking for stocks which have not rallied in anticipation of earnings. Even better is stock which has no analyst coverage and is neglected. Stocks with less than 100% plus earnings also breakout, but to prioritize, I only focus on above 100.
* Breakout: An earnings surprise on stock which has not rallied significantly will lead to breakout next day. Most of the time I will enter in the morning and add to position later if the volume climbs above average volume. Many times such stocks will gap up 5 to 300% on day of earnings and still make further moves of 20 to several hundred percent in next 3 to 12 months. I look to capture such moves. Most of these breakouts will have minor pullback at best and just go up for 2 to 6 weeks before having a reaction. So if you don't enter on the earnings day you will be just a observer.
* Stops: I put stops below the gap low if it is gap up or at 2 days low and trail with stop. In these trades I move my stops quickly once it makes 20% move. Objective in such method is to capture several 20% moves.
* Watchlist: I maintain a watch list of stocks which respond with a breakout on earnings day of 4% plus for next one year. These stocks often have several more breakouts during the year and make multi month or multi year moves. All major movers like DRYS, FSLR, MA, AAPL, ICE,MOS, CF, BIDU, CRNT, CSIQ, ISRG, FTK, BCSI, RIMM, STP, PCLN and several others had their rallies starting with their earnings day breakouts. You can confirm this for yourself. After their earnings day breakout they went on to make 100% to 800% plus moves in next 2 to 4 quarters. In each case they had significant earnings acceleration or surprise. Same way if you look at short side you will find several opportunities.But for obvious reason I concentrate on long side.
* How many opportunities: Even in bear markets you will find opportunities using this strategy. If you set up your system properly, you should find 20-25 opportunities like this in every earnings season. When market expectations are low, or market has had several months of correction, you will find 50 to 100 opportunities in an earning season.
I have detailed several examples of this on my blog and written about this strategy several times.
Now this is just one way to trade earnings. The other way to trade earnings is to trade the "Pre Earnings Season Drift". In this analyst earnings projections are used to buy stocks which are showing significant change in analyst earnings projection. The stock is bought 4-6 weeks before earnings season in anticipation of good earnings.
If your time frame for trading is more than one day or few days, earnings based strategies can offer you very profitable way to trade the market. At the end of the day the entire stock market is about earnings and earnings expectations.
It is not easy, but it is the basic concept behind some of the most profitable strategies on the Street.
Each quarter when companies report their earnings, there are usually a handful of companies whose earnings are either surprisingly good, or shockingly bad. You can immediately recognize these companies by the post earnings announcement jump or plunge in their respective stock prices.
Now the implication of this is not for short term traders but for long term traders. If you look at the stocks which had surprisingly good or bad earnings three quarter down the line you will notice that the stocks that had positive earnings surprises continued to go up, on average. Similarly stocks which had significantly negative earnings surprise continue to go down for next three quarters.
Academics call this PEAD. The stocks with earnings surprises exhibit post earnings announcement drift, or PEAD for short. This PEAD effect was first identified in a paper published in 1968, almost 40 years ago. Since then numerous studies have shown this effect continues across world markets.
Now there are number of ways to trade earnings if you understand this. Buying stock post earnings is one way. In this case the event risk is out of way . If the stock was not rallying in to earnings or if this was first or second major earnings acceleration, you can enter on day or earnings and hold it till next earnings season or two. I have traded this strategy for last 7-8 years with very good results. It takes 2-3 earnings season fr most new traders to master. So if you are a longer term trader trading earnings is very profitable.
So if you are looking for a profitable strategy to trade, you might be interested in putting together a working plan for this earning season.
* Earnings Data Sources: You need a reliable source for earnings. I use the Investors Business Daily and Wall Street Journal for this. Besides these two there are many other sources of earnings. When choosing a source I look at how they adjust earnings for one time events. Overall IBD does a better job on this.
* Three types of earnings announcements: Earnings announcements are made after close, before close and in some rare set of companies during market hours. I concentrate on the earnings announced after market close. They appear in the IBD daily edition under 'Company Earnings Report' section.
* What to look for in earnings: To narrow the set of companies to track and trade for this strategy, based on my prior experience, I only track companies whose earnings are up 100% or more quarter over quarter and the earnings should be at least 5 cents. Sales/revenue should be up 5% or more. Doubling of earnings is significant. Few companies meet that criteria. So I put all the stock meeting this criteria in a list. Now what one is looking for is earnings acceleration. IBD will have those stocks with up arrow to indicate earnings acceleration. Besides that I look for price action on that stock by looking at how much they are up in last 65 days or so(stocks up less than 25% in 65 days prior to earnings do best). I am looking for stocks which have not rallied in anticipation of earnings. Even better is stock which has no analyst coverage and is neglected. Stocks with less than 100% plus earnings also breakout, but to prioritize, I only focus on above 100.
* Breakout: An earnings surprise on stock which has not rallied significantly will lead to breakout next day. Most of the time I will enter in the morning and add to position later if the volume climbs above average volume. Many times such stocks will gap up 5 to 300% on day of earnings and still make further moves of 20 to several hundred percent in next 3 to 12 months. I look to capture such moves. Most of these breakouts will have minor pullback at best and just go up for 2 to 6 weeks before having a reaction. So if you don't enter on the earnings day you will be just a observer.
* Stops: I put stops below the gap low if it is gap up or at 2 days low and trail with stop. In these trades I move my stops quickly once it makes 20% move. Objective in such method is to capture several 20% moves.
* Watchlist: I maintain a watch list of stocks which respond with a breakout on earnings day of 4% plus for next one year. These stocks often have several more breakouts during the year and make multi month or multi year moves. All major movers like DRYS, FSLR, MA, AAPL, ICE,MOS, CF, BIDU, CRNT, CSIQ, ISRG, FTK, BCSI, RIMM, STP, PCLN and several others had their rallies starting with their earnings day breakouts. You can confirm this for yourself. After their earnings day breakout they went on to make 100% to 800% plus moves in next 2 to 4 quarters. In each case they had significant earnings acceleration or surprise. Same way if you look at short side you will find several opportunities.But for obvious reason I concentrate on long side.
* How many opportunities: Even in bear markets you will find opportunities using this strategy. If you set up your system properly, you should find 20-25 opportunities like this in every earnings season. When market expectations are low, or market has had several months of correction, you will find 50 to 100 opportunities in an earning season.
I have detailed several examples of this on my blog and written about this strategy several times.
Now this is just one way to trade earnings. The other way to trade earnings is to trade the "Pre Earnings Season Drift". In this analyst earnings projections are used to buy stocks which are showing significant change in analyst earnings projection. The stock is bought 4-6 weeks before earnings season in anticipation of good earnings.
If your time frame for trading is more than one day or few days, earnings based strategies can offer you very profitable way to trade the market. At the end of the day the entire stock market is about earnings and earnings expectations.
It is not easy, but it is the basic concept behind some of the most profitable strategies on the Street.
http://www.minerviniprivateaccess.com/examples.pdf
If you study this very carefully, this guy buys before earnings and sells when earnings day a stock pops. Many of the trades there are examples of pre earnings drift trading.
Some people understand how earnings work and then there are others who will tell you to stay away from earnings.
It all depends on your time frame, perspective, and market understanding.
If you study this very carefully, this guy buys before earnings and sells when earnings day a stock pops. Many of the trades there are examples of pre earnings drift trading.
Some people understand how earnings work and then there are others who will tell you to stay away from earnings.
It all depends on your time frame, perspective, and market understanding.