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Avoiding earnings mistakes

Hey Five Star Trader,

Last week, I touched on some of my favorite tips and tricks for trading earnings. This week, I want to share with you some of the biggest lessons I learned when trading reports.

Here are my top three lessons I learned…

1) History is your best friend
A big mistake that traders tend to make is putting too much emphasis on the anticipated report that is coming out, rather than approaching it from a historical standpoint. As with most things, you can learn a lot from history, and in this case, it’s crucial to take a look at how the ticker behaved in past reports as well as the upcoming one. For example, if a company’s price gapped up 11 times out of the past 12 quarters once their report was released, it is reasonable to think there is a strong possibility it will do it again. Though it isn’t a guarantee, you have a much better chance of anticipating how it will act if you studied its historical data.

2) Pay attention to consumer appetite
The market is constantly changing to adjust to consumer appetite. A major mistake a trader can make is to jump into an earnings trade without first taking into account whether or not consumer behavior is shifting. Before picking a ticker, ask yourself if that company or product is still in line with what consumers what.

3) Consider volatility and adjust risk
As some of you may know, managing risk is my golden rule for all of my tradings, especially including my earnings trades. When trading a report, oftentimes volatile moves can happen overnight in the after-hours. Since there are no trading options during those after-hours these trades can be “win or lose” situations so due to its high steaks, never ever put on more risk than you are willing to lose. That is the number one mistake I see traders making when putting on earnings trade.

Trading earnings can have a bad reputation, due to the volatility involved. However, if we can harness the volatility, therein lies massive opportunity, if you know what you’re doing.



Want to learn more about how to take advantage of quarterly gains? Join me for my free webinar on Wednesday, March 31st, at 7:00 pm Central. We will be covering setups, case studies, and more.

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