Why It May Be Best To Not Enter New Positions Within 2 Weeks Prior To Earnings
When a bullish stock is trending very well, it can be tempting to buy shares regardless of a quickly approaching quarterly earnings report, when you fear missing out on a good ROI.
Although the earnings report can cause price to skyrocket further to the upside, it can just as easily cause price to fall drastically.
Because of this, it is usually recommended by many successful traders to refrain from any new positions one to two trading weeks prior to earnings on any particular stock.
Shown below is a great example where getting into a stock just prior to earnings would have been a very unfortunate event. The chart shown below is the daily chart of Facebook, which dropped roughly 20% in value after the recent earnings report that was released July 25th, 2018.
Even though price was trending well and respecting the 20 SMA, it couldn’t hold strong when earnings was released.
To be fair, the earnings can often propel price upward, as mentioned at the beginning of this blog.
Shown below is the stock TRIP (Trip Advisor), which is one of the many examples of this. After earnings in May 2018, price gapped up and broke above a strong level of previous resistance, which then led to a bullish trend.
Note: This stock wouldn’t have been considered whatsoever prior to that earnings release due to the long consolidation leading up to it.
I’ve given two examples that produced two completely different results, which brings me to the main point I’d like to make regarding this topic.
Earnings can often cause price to move a great distance in either direction, which can cause you to get stopped out of a trade very quickly if it goes against you. Trading too close to earnings puts you close to the line of fire, causing you to put your exposed capital at a greater risk.
From a conservative standpoint, this makes it a smarter choice to stay out of a stock with earnings approaching, because we want the odds to be in our favor as much as possible when entering new trades.
When you’re trying to profit off earnings, you’re playing the markets and essentially gambling.
Another reason I would recommend waiting for earnings to pass is due to the emotional aspect of trading. When earnings is approaching, there is a lot of news and gossip that circulates, trying to predict which way the stock will move. This can cause irrational decisions and damage to your capital. As I always mention, it is best to keep your trading as mechanical and emotionless as possible!
You will be just fine with the mindset of preserving your capital. When you prevent greed from creeping in, you can be smart in your trading decisions and let price make it’s move first. There will be thousands of great trading setups in the future, so please don’t let the fear of missing out cause you to gamble your money with the hopes that a volatile earnings report will go in your favor.
Trading is a business. Don’t let another company’s earnings report potentially hurt your business as well.
Happy Trading!
