Earnings season[1] can be a great time for a trader to get insight on their equity investments, as well as benefit from short-term volatility. But in order to maximize this trading opportunity, there are some key considerations to make before diving in. Read on for our three steps to follow when using earnings reports for trading.
3 Steps for Using Earnings Reports in Your Trading
Preparing for earnings season involves choosing the companies to focus on and undertaking thorough research on the market before executing the trade.
1) Choose Companies to Focus On
The first step is to select the stocks to trade during the period. It is advisable for traders to go for a small number of companies, perhaps stocks with which they are familiar or trade already and find out the dates on which their earnings will be released. Large bellwether stocks are worth investigating, whether one is trading them or not, as their results can impact wider industries.
When deciding on the stocks to go for, traders should understand that the relationship between an earnings result and subsequent price reaction is not always straightforward. Although better-than-expected earnings are generally bullish, they do not always translate to immediate price gains and the opposite holds true as well. An example of this can be seen below, with Walmart’s strong earnings in Q3 2018 failing to excite market participants.
While encouraging, a quarterly report is more than last quarter’s results compared to expectations. Indeed, analysts are often much more concerned with the future expectations of the firm as price is a forward-looking metric, with future earnings being calculated in current prices.
With that in mind, it becomes more reasonable when investors shy away from a stock with strong results for the past quarter, but an abysmal
