Many professional traders I’ve been following like Kerry Lovvorn, Alexander Elder, Alan Farley to name a few, have said that holding trades into earnings announcement was a random endeavor. But we often see how earnings announcements make stocks move and seem to create opportunities. It depends much on the strategy itself and what the perspective of holding period is, but since my work relies on technical analysis and earnings has more to do with fundamentals, it’s mostly a gamble for me.
A trader needs to evaluate earnings speculation for his or her own trading style. Let’s look at it from timeframe perspective.
Day traders are by definition in cash at the time of earnings announcement. When earnings surprises make stocks move, day traders can have short-term opportunities on the open. One of the most popular strategies is open gap fill, where a trader anticipates the gap to get at least partially filled and that’s a mean reversion trade.
When I have my swing trader hat on, I never hold positions through earnings announcements. I have no technical edge in it and therefore results are purely random. Sometimes it means exiting a position just before price makes a great move in the trade’s favor, but actually there will be just as many times when the opposite happens. I’ll show an example of a long and short trade from my backtesting. Green arrow marks the buy signal (cover for short) and red arrow marks the sell signal (entry for short). I see these kind of gaps happening all the time and that’s why I don’t hold swings through earnings. The first chart below is NFLX long in 2012, and the second chart is IT short in 2014.
However, when I put my trend follower hat on, I want to stay in a trade as long as possible and exit only when the stop takes me out. Thanks to wider stops that give more wiggle room for trades, I can allow trend positions to run through earnings announcements. Besides stop placement, position sizing has an important role in risk management in this case. It doesn’t make earnings results to be less random, it just doesn’t affect trades that much.
Even good news can make the stock fall and vice versa. For a technical trader like myself, it’s more important how the earnings announcement affects price action than the earnings itself.
Lesson Learned: Trading into earnings is a crapshoot.Share this post