Earnings Trading Strategies

Trading Strategies Around Company Earnings

Earnings seasons kick off two weeks after the end of each financial quarter – January, April, July, and October – and can last up to six weeks. 

This period presents opportunities for traders who specialise in capturing market reactions to earnings releases.

Understanding the 'Reprice'

A ‘reprice’ occurs when new information significantly alters a company’s perceived value – think of a stock previously valued at X, now considered to be worth either 1.2X or 0.8X due to fresh earnings data. These adjustments are not always straightforward but are crucial drivers of institutional money flows and subsequent price changes.

Trading Strategy: The Reprice Reaction

  1. Positioning: Anticipate the reprice and position yourself for the directional move following the initial impulse.
  2. Execution: Wait for the stock to show a pause or pullback after the impulsive move, then trade in the direction of the breakout.
  3. Risk Management: Allow for a retrace or pullback to better position your stop-loss and minimize the risk of a V-shaped reversal.

Day-by-Day Breakdown

  • Day 1: If direct trading on earnings release day is too risky, consider observing the market’s initial reaction.
  • Day 2 and Beyond: Post-earnings days offer plenty of opportunities as well. Key levels from overnight sessions can guide your trades for several days.

Technical Tools and Tips

  • Use trading sessions (ETH for after-hours and RTH for regular hours) to gauge market sentiment and identify key levels.
  • Tools like TradingView and Finviz can help screen for earnings movers.
  • Manage risks by being prepared to miss some setups in favor of capturing more significant, confirmed moves.

Conclusion

Earnings season trading is about preparation, patience, and precision. Anticipate market moves, react with a planned strategy, and adapt based on price action. Whether you engage in immediate post-earnings trading or prefer 1 to 3-day swing trades, understanding and adapting to the dynamics of earnings releases is important.