What is trading by earnings reports?
Trading by earnings reports is when you are betting on a stock to go up or down right before a company report their quarterly earnings.
Is trading earnings report right for you?
First of all, trading earnings reports is a high risk, high reward style of trading. If you are a beginner or if you can’t tolerate a 10% loss on a single day, I wouldn’t recommend you trade earnings report. The reason is simple, sometimes a stock can drop more than 10% when a company’s earning misses wall street analysts had expected. That is not to say trading earnings is not profitable. If you do it correctly, you can make thousands in a few days just by trading earnings report. A stock can go up over 10% in a single day when the company reports good earnings or earnings that beats wall street exceptions.
High probability trading for earnings report
Here are a few strategies that I use to make a high probability trade using earnings reports. Let’s say if we are going to trade Microsoft, below are some research that we must do.
1. General Stock Market -Is the general market good? Are other companies reporting good earnings? If the answer is no, you should stay away from trading the earnings report.
2. Stocks within the same sectors – Is other stocks in the same sector reporting good earnings? In the case of Microsoft, you will want to check how the technology sectors are doing. There are companies that Microsoft do business with or their competitors that report earnings prior to Microsoft’s earnings reports such as Intel, AMD, Apple, Oracle, Dell and HP. If they are doing well, chances are Microsoft will do well. Microsoft is the world’s largest software and windows maker and they use Intel chips. Please note, they are not 100% correlated, so there is still a chance when Intel beats earnings estimate while Microsoft misses.
3. How the stock is doing – You need to do research on the stock itself by reading their balance sheet and analyze their stock. Are they beating earnings estimate in the previously quarters? Are they doing well relatively to the other companies in the sector?
4. Stock Charts – This is not as important as the previously 3, but you want to study it anyway. Analyze the Dow, SPY and MSFT chart. Are they in an uptrend? Are the chart bullish? If the charts are bullish, there is a good chance it will continue.
