Hey 5-Star Trader,
We are in the midst of earnings season while also experiencing extremely volatile market conditions. This combination makes it difficult to know when and how you should be making moves. That’s why I’m revisiting my top three “lessons learned” when trading earning reports…
1) Always look at historical data
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 this historical data.
*My favorite tool to help me analyze trends is my Hot Zone earnings tool!
2) Consumer appetite is important
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 want.
3) Consider volatility and adjust risk
As some of you may know, managing risk is my golden rule for all of my trading, especially my earnings setups. When trading a report, oftentimes volatile moves can happen overnight in the after-hours market movement. Since there is no trading available during those after-hours these trades can be “win or lose” situations. Due to the high stakes, 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 trades.
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.