How to Trade Earnings: Step by Step Guide?

Earnings season presents some of the best trading opportunities, given the volatility that comes into play. The sessions occur four times a year, during which companies file financial and operational reports for the first, second, third and fourth quarter. The sessions usually last a few weeks after each quarter.

Given the relatively big price swings that come into play, trading earnings is a sure way of generating a fortune in the stock market. However, it is important to note that the periods can also result in significant losses on an invested company reporting disappointing results.

During earnings session, investors pay close watch to two things:

· The company’s performance in the quarter

· The company’s projections

A company that reports impressive quarterly results followed by a projection that signals continued growth often elicits bids in the market. Likewise, a company that reports disappointing results followed by disappointing guidance often faces the market’s wrath, resulting in market sell-off.

If planning to trade earnings, it is important to pay close watch to the following things.

When is the company reporting?

Trading earnings is all about timing when a company is poised to report, to take advantage of the volatility heading into the earnings and after the earnings session. Some earnings calendars show the exact date and time a company is poised to report its earnings in the decentralized digital world.

Earnings calendar present all the companies that will rep [ort in a given day while also sharing previous earnings results and forecasts. Similarly, online tools provide a list of notable earnings to pay close watch to as they are likely to have a significant impact on the market.

Look at Estimates

After knowing when a company is poised to report, it is important to pay close watch on earnings estimates. Analysts from major banks and investment funds research various companies, conversely providing earnings estimates.

Estimates are simply the results on earnings, revenues and margins that analysts expect companies to post. Estimates are crucial as they are compared with actual results on the earnings day.

Stocks of companies whose financial results beat analysts’ estimates often time rally, while those whose results fail to beat estimates are often the subject of sell-off in the market.

Understand the Parameters

In addition to paying attention to the estimates, it is important to understand the various parameters used by investors. In addition to earnings per share and revenues, it is important to look at monthly active users for some companies and gross margins.

earnings screener would be an important instrument to use while trading earnings. The tool allows traders to separate stocks based on different metrics. In this case, one can only trade earnings that meet a given profile or criteria.

Use a company to predict another company.

While trading earnings, it is important to pay close attention to the numbers that other companies in the same industry are posting. All factors held constant and subjected to the same conditions companies in the respective industry tend to perform the same way. Similarly, they tend to receive the same reactions in the market.

For instance, if Goldman Sachs was to report impressive earnings on Monday and rally, there is usually a high probability that JPMorgan would also post impressive results and consequently rally.