Trading During the Earning Season – Introduction
The earnings season is the most interesting period for any stocks trader. It comes after every three months when firms release their quarterly earnings and do their earnings call. This is the period when most stocks traders make a lot of money. In this article, I will highlight the best way to trade during the earnings season.
- Companies, Date, and time
First, you need to know which companies are releasing results during a particular day and what time. Companies usually release their results before, during, and after the market opens. To become a successful trader during this time, you must know this so that you can place your trades accordingly. This information is freely available in several websites like investing.com.
- Expected results
You should now look at the results investors are expecting. Before a company releases its results, Wall Street firms predict the revenue and earnings per share (EPS) that the company will have. They predict this using their models and the company’s past performance. The rule is that when a company misses the estimate, chances are that its share price will fall. Therefore, you should always consider looking at the expected results.
- Other metrics
Sometimes, a company’s stock price will fall even when it releases excellent results. This happens because investors look at other things besides the headline numbers. For instance, they look at a company’s guidance and whether it is reaffirmed or changed (downwards or upwards). Investors buy companies because they expect to benefit in its growth. Therefore, if a company’s guidance shifts downwards, chances are that there will be a sell-off. If it guides upwards, investors will likely buy more shares. In other cases, they look at comp sales. This is more in the retail and restaurant sector. In this case, a company can beat on revenues and EPS but if its comp sales are on the decline, investors will exit. Another metric to look at especially in technology companies is the number of active users. For instance, Twitter recently released its results which showed declining revenues. However, the company’s stock went up as the company added more users in its platform. Therefore, you should look at these things.
- Comparable companies
It is also important to look at comparable companies. This is because most companies usually follow the same trend. For instance, if an investment bank like Goldman Sachs reports increased trading revenues and increases its guidance, chances are that its competitor, Morgan Stanley will have improved numbers. Therefore, if Goldman’s numbers are good, you can buy Morgan Stanley. However, this does not always work. In this quarter, while all the major banks saw increased revenues, Goldman saw increased revenues that missed earnings forecasts.
- Protect your trade
In stocks trading, volatility is usually very high during the earnings season. This is because this is the period when investors make the decision of buying, holding, or selling their stakes. Therefore, it is very important to protect your account by having a stop loss in every trade that you open. The point that you place your stop loss should be where you feel confident that the money you lose will not hurt your financials. Like I have mentioned before, as a trader, you should carefully evaluate your risk-reward ratio.