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How to trade earnings

Posted on 3/30/2007

The earning season is fast approaching. Earning season offers some of the best opportunities for profitable trading. PEAD or post earnings announcement drift is a well studied and proven market anomaly. Stocks which have significant earnings surprise or acceleration, breakout post earnings and rally for next 3-6 months as market reacts to this new earnings power. Sometimes these rallies last years.

So if you are looking for a profitable strategy to trade, you might be interested in putting together a working plan for next earning season.

  • Earnings Data Sources: You need a reliable source for earnings. I use the Investors Business Daily and Wall Street Journal for this. Besides these two there are many other sources of earnings. When choosing a source I look at how they adjust earnings for one time events. Overall IBD does a better job on this.
  • Three types of earnings announcements: Earnings announcements are made after close, before close and in some rare set of companies during market hours. I concentrate on the earnings announced after market close. They appear in the IBD daily edition under 'Company Earnings Report' section.
  • What to look for in earnings: To narrow the set of companies to track and trade for this strategy, based on my prior experience, I only track companies whose earnings are up 100% or more quarter over quarter and the earnings should be at least 5 cents. Sales/revenue should be up 5% or more. Doubling of earnings is significant. Few companies meet that criteria. So I put all the stock meeting this criteria in a list. Now what one is looking for is earnings acceleration. IBD will have those stocks with up arrow to indicate earnings acceleration. Besides that I look for price action on that stock by looking at how much they are up in last 65 days or so. I am looking for stocks which have not rallied in anticipation of earnings. Even better is stock which has no analyst coverage and is neglected. Stocks with less than 100% plus earnings also breakout, but to prioritize, I only focus on above 100.
  • Breakout: An earnings surprise on stock which has not rallied significantly will lead to breakout next day. Most of the time I will enter in the morning and add to position later if the volume climbs above average volume. Many times such stocks will gap up 5 to 300% on day of earnings and still make further moves of 20 to several hundred percent in next 3 to 12 months. I look to capture such moves. Most of these breakouts will have minor pullback at best and just go up for 2 to 6 weeks before having a reaction. So if you don't enter on the earnings day you will be just a observer.
  • Stops: I put stops 1 dollar below the gap low if it is gap up or at 2 days low and trail with stop. In these trades I move my stops quickly once it makes 20% move. Objective in such method is to capture several 20% moves.
  • Watchlist: I maintain a watch list of stocks which respond with a high breakout on earnings day of 4% plus for next one year. These stocks often have several more breakouts during the year and make multi month or multi year moves. All major movers like NTRI, HANS, TIE, AAPL, ICE, GROW and several others had series of 100% plus earnings growth during their entire rally period. The oil stocks which had a stellar rallies for last couple of years or the steel stocks also had several triple digit earnings.
  • How many opportunities: Even in bear markets you will find opportunities using this strategy. If you set up your system properly, you should find 20-25 opportunities like this in every earnings season. When market expectations are low, or market has had several months of correction, you will find 50 to 100 opportunities in an earning season.
So if you are looking for making gang buster returns in this coming earning season, just get your databases and information sources in place and you will find several opportunities. This is one trade which is easiest to trade as there is clear identifiable catalyst. Plus in a year there are 4 earnings season.

Season of profitable opportunities starts next week. You will be pleasantly surprised by the results you get. Carpe diem.

Related posts :
How to trade earnings Part2
How to trade earnings Part3
Earnings and Bulkowski
Improving odds in earnings breakout

Related posts from last earnings season:
Earnings Season- Time to be very careful...
Earnings and Dan Zanger
Earning Surprise System for $1495
Trading Earnings Breakouts
Earnings Acceleration- Long Term Impact
Trading Earnings Breakout -Part1
Trading Earnings Breakouts -Part2
Trading Earnings Breakouts -Part3

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    SP said...

    Great work Pradeep. I am looking forward to your posts. This is a great education for me as I am just starting out in Investment world.


    James said...

    Thank you so much to share that information!

    This will be my first 'earnings season' and I am very much in need of any advise.

    I'm learning a lot by reading your blog. Your experience is very valuable to me.

    Unknown said...

    James and S,

    As Pradeep said do read Inverstors Business Daily.

    Do not read Barrons, the weekly newspaper put out by the WSJ on Saturday. I've lost more money following those guys. Now I will not even look at it on the news stand.

    Pradeep Bonde said...

    One good thing about the earning season is so many are scared of earnings season that they do not even bother to look at the opportunity.

    Someone posted this post on some discussion board,
    Promptly someone replied:
    "Is this guy who wrote this article suggesting we should hold stocks through earnings? if so, its a very dangerous risk to do do. big rewards if right, but disastrous if wrong. Is it worth the gamble? "

    Now obviously the guy who wrote that did not even bother to read and understand what the strategy is. Most traders are conditioned to think that way, and hence they avoid the earning season.

    James said...

    What do you mean by: "When choosing a source I look at how they adjust earnings for one time events."

    I don't get the last part of the sentence.

    James said...

    ... and could you tell me why do you concentrate on earnings announcements made after close?

    Pradeep Bonde said...

    Earnings announced by companies often have one time gains from various activities. When comparing growth rate with prior quarter one needs to remove such one time gains. Different data providers use different methods for this. That is why you will see for same company different data providers showing different % growth for earnings.

    I concentrate on earnings announced after close because it is convenient, you get to study them in the evening/night/next day morning and decide how to trade. Also when you use a database like IBD its printing schedule only gives you earnings of companies which announced earnings in the morning and after close.
    During the earning season, there are enough opportunities in 100% plus earning movers which declare in evening. Improvisation is key in this, otherwise there are too many opportunities. I target 20-25 out of them. If I have unlimited capital I will look at all. But the 20-25 itself are more than enough. Because I have done this for over 25 earning season now, I have pretty high success rate amongst the 20-25 trades which I make using this strategy.

    skyricho said...

    As a newbie to speculative trading I am limiting my trading universe to the IBD200. Will the IDB200 provide the 20 - 25 opportunities this trading strategy can expose?

    Pradeep Bonde said...

    No these are two different strategies. Some stock might be in IBD 200 from earnings trade but the idea behind the earnings breakout trading is different.

    Anthony said...

    What is the earnings play with net income above 100% but the sales/revenue is not?

    Pradeep Bonde said...

    'What is the earnings play with net income above 100% but the sales/revenue is not?'
    Not clear what is your question.

    ybn said...


    When you are looking for earning over 5 cents are you referring only to current quarter or also the last year comparing quarter? It is easy to be over 100% and over 5 cents if last year was small or negative.

    ybn said...

    to garyatt,

    You don't have to sign to IBD paper edition. You can subscribe to the on-line version which cost a bit more but you get it about 3-4 hours after the market closes. It has two versions which you can choose. One in section by section format and the other is an exact copy of the printed version. I use the second one, which I download first to my desktop.

    Pradeep Bonde said...

    Current quarter.
    A change from negative earnings to positive earnings indicate acceleration.

    bielyplafon said...

    I want to ask what is your experience with accuracy of 'EPS Last Qtr' in Telechart.

    Thank you in advance
    Best regards and thank you for blog

    Pradeep Bonde said...

    Many problems with the data. Incomplete data, frequency is issue. Worden has another products based on Blox, for that hey sell fundamental data, that data it seems is good.

    atd said...

    Hi Pradeep,
    Thanks for sharing this strategy. I'm trying to see how it works but I'm having trouble at the first step: re: daily edition under 'Company Earnings Report' section. I'm looking at the eibd daily and can't seem to find that section: Thursday, Friday and Monday Apr 7. Can you point this out for me? I've just subscribed to IBD so this is new for me. Not sure if I'm better of posting this in the member's section or not...


    Pradeep Bonde said...

    In Friday's (4/4/2008) paper go to page B7 and look at last column on right side.

    estebanv said...

    As a day trader and low capital, earnings sessions I dont hold overnight, thats gambling if you have no experience reading fundamentals. I dont have that experience, so I dont do it.

    However, I do look at stocks that gap up or down on earnings season.
    And after they gap up I look for intraday setups to enter, and then I make money on that. No gambling

    DIBYN said...

    Hello..I have a few do arrive at the sell decision on a earnings play?..and how to decide whether a earnings play will go up 100% or more ...or its just a 20% kind of play?..
    3.Do you use a trailing stoploss or have a specific profit target?

    Pradeep Bonde said...

    How much a stock will move is function of how much was earnings growth , surprise and future guidance , based on that I arrive at approximate target. Most of the time I have specific target before I put trade.

    Unknown said...

    Hi Pradeep,

    Newbie question here about earnings report. When you say it must be minimum 100%, does it mean 100% change difference comparing the earnings from same/current quarter over last year or just only the current quarter alone?

    Pradeep Bonde said...

    over last year