In last week’s article, we highlighted some of the dynamics surrounding earnings season. Today we’ll explore how traders should behave around earnings announcements.
Before any trader attempts to trade stocks around earnings, they must first accept one immutable truth – no one can consistently predict the direction a stock will gap following earnings.
It’s a coin flip each and every time.
Even if you knew what the earnings were going to be ahead of time, you still don’t know how Wall Street is going to react. And don’t think it’s as simple as good earnings equal gap up and bad earnings equal gap down. It’s not uncommon to see stocks sold on good earnings and bought on bad earnings. Such is the fickle nature of the stock market beast.
Think of earnings as a binary event with two possible outcomes. Either investors love the earnings number and the stock gaps up or they hate it and the stock gaps down. While the gap is all but assured, the direction of the move remains elusive.
How to behave around these quarterly rituals depends in large part on the type of trader you are.
If you’re a longer-term player buying and holding stocks for months on end, you’ll of necessity, be holding into these announcements. You better make sure you’re comfortable with the underlying fundamentals of the company and aware of how much the stock typically gaps around earnings. Take that into account when deciding how many shares to buy.
If you’re a short-term trader, I highly recommend exiting your positions before earnings. There’s no way to shift the odds in your favor so why roll the dice? You should be looking for opportunities where the stock has a high probability of moving in one direction over the other. Since earnings are always a 50-50 shot, you shouldn’t be playing.
The date of a company’s earnings is announced beforehand and published on a number of earnings calendars available on the web. Before buying a stock, be sure to check when its next earnings announcements is scheduled for. You don’t want these events to sneak up on you.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.