5 Easy Steps to Navigate Earnings Season Better than the Pros

Earnings season can be a joyous time or cause mini heart attacks. Everything falls back to one important piece, preparation. Whether or not you prepare properly for earnings will determine success or failure.

Traditionally, preparation means committing time for research. Unfortunately, casual / hobby investors don't have full-time jobs sifting through past earnings reports, fundamentals, market trends, etc. to gain an edge. The good thing is, you don't need that crap anyway. Follow these basic steps to successfully navigate earnings season better than the pros:

1. Write down the earnings dates of all your holdings. Go to the Yahoo Finance earnings area and search your tickers one by one. Open a simple text file and save it to your desktop as "earnings". Write down the ticker, date, and if earnings are due in the AM or PM (ie before the bell or after the bell). Order the file by date of earnings, top to bottom, for easy tracking.

2. Write down the earnings dates of the key leading stocks of each group your holdings are in. Expand your new simple text file to include the leading stocks and their earnings dates. Why? Because how the leading stocks react to their own earnings will most often impact the other stocks in the group. As far as finding these leading stocks, I recommend using investors.com. The service makes this easy by breaking down the leading stocks in each industry group via their stock checkup tool.

3. Treat every position the same way BEFORE the earnings release. By sticking to a pre-set guideline for each position, you remove emotion and regret. For example, a rule could be "I will always sell half my position atleast three days before its earnings report." So, if one of your holdings blows it out of the water, you are fine with the result. If it completely misses and tanks, you are fine with the result as well. It becomes a simple numbers game and nothing more.

Furthermore, you can apply the same rule to take into consideration leading peer stocks that will report before your own holding. Rule example, "If the leader of the group falls atleast 5% after earnings are posted, I will sell atleast 75% of my stock's position." If the leader of the group blows out earnings and tanks on expectations, your stock could have a similar fate. Knowing that odds are now against you, why take on added risk?

4. Treat every position the same way AFTER earnings are out. Post earnings reactions, whether positive or not, should be a emotionless experience. Yes, no emotion. By preparing the exact same way, your rules for engagement prepare you for any fate. Now, you can react to the earnings accordingly. Post earnings rule example, "If my stock gaps up atleast 5% at the open, I will re-buy my full position." Or "If my stock gaps down atleast 3% at the open, I will sell my remaining shares entirely."

5. Review your results and tweak your rules for next time. Every trade should have post-analysis conducted. No matter how successful the trade, the good and bad should be noted along with a screenshot of the chart. Rules remove emotion and keep you disciplined, developing them though takes times. Tweak your rules and move forward with confidence.

SEE ALSO: 6 Great Ways to Minimize Investment Risk with Earnings Releases

Comments

  1. Posted by MarkWolfinger on April 12, 2011 at 6:23 pm

    Blain,
    Don't ignore that one possible strategy involves writing covered calls on a portion of the portfolio. Just prior to earning being released, those options tend to trade at elevated prices.

    This is only suitable for traders willing to accept a cap on profits and who do not want to sell their shares before earnings.

    Regards

  2. Posted by Blain on April 12, 2011 at 6:30 pm

    Good call Mark. If more experienced and know how to take advantage of this route, options are definitely a suitable consideration. In this piece in particular the KISS, keep it simple stupid, mentality was in focus. Hope this market is treating you well!

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