How to trade on earnings season: six tips for getting the most out of earnings reports

Katya Stead
Financial Writer
One of the most exciting times on the economic calendar for traders and investors is earnings season.

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The quarterly reports of financial results from the world's most powerful public companies (like Tesla, Apple, Nvidia, Microsoft and Alphabet) bring with them hype, headlines and a lot of opportunities for traders.

Read on for some tips for how to make the most of earnings season before, during and after the results roll in.

How to trade on earnings season effectively:

  1. Brush up on your fundamental analysis
  2. Ensure you have a trading strategy for multiple scenarios before the time
  3. Check past financials, as well as present ones
  4. Also check out competitor stocks to have an accurate comparison
  5. Keep an eye on the bigger picture (link to macro articles)
  6. Have a clear exit strategy and a risk management plan

Brush up on your fundamental analysis

There are many different methods of analysing the stock market and other assets, but the two main schools of thought are technical analysis and fundamental analysis.

Fundamental analysis involves studying a company's financial statements like its income statement and balance sheet to get a sense of how well the business is doing in terms of its solvency, cash flow, profitability and growth prospects. This will arm you with sound knowledge of the facts and figures when going into earnings calls, to see if the company's profit goals and earnings estimates are realistic and signs of good news ahead (aka strong earnings) or not-good news (aka disappointing earnings, or declines in profits, earnings per share or other key figures).

Ensure you have a trading strategy for multiple scenarios before the time

On the surface, trading earnings seasons seems simple: you wait for the earnings call and go long on the company's stock price if you think it'll be positively-received quarterly earnings and that the share price will rise. You'd go short if you believe unexpected shocks or negative results are likely. And you'd make a profit if you're correct and a loss if you're incorrect.

In reality, earnings releases are emotional times, with lots of data and nuances to unpack in a very short time. To combat this, ensure you have an earnings report trading strategy well-rehearsed beforehand. Make sure you know how much you're willing to trade, what you think will happen and what to do if this seems to be the case - but also what you'll do if another scenario plays out.

Check past financials, as well as present ones

In order to get the most out of earnings statements, context is key. So, in order to get the most out of the current quarter's earnings season release from the company you've been eyeing, ensure you read up on previous quarters' results too, as well as annual reports and their share prices' performance in the days leading up to the announcement. And, do it before earnings day begins.

This will give you a solid foundation of data for factually and objectively analysing the numbers. Remember, the CEOs, financial directors and other market participants associated with an earnings release have a very vested interest in presenting the information in as positive a light as possible. The more financial data you are equipped with before earnings announcement day, the more you'll be able to assess financial results based on your own trading needs (or investment objectives), not someone else's.

Also check out competitor stocks to have an accurate comparison

This ties in with our previous point. The financial results released by big companies are not only important in terms of their past results - often, one of the biggest drivers of price swings in earnings season is how well, or badly, an individual stock is doing as compared with industry peers' share prices.

For all of the fundamental analysis you do of your chosen company's stock price in previous quarters, years and days leading up to the earnings announcements, it's wise to do the same with two or three of its closest peers, fiercest rivals or even potential up-and-coming disruptors. Look at their historical figures and current performance in their own earnings event, and compare them at every turn.

Who knows? You may even find your new favourite stock to back for the next earnings season.

Keep an eye on the bigger picture

The stock market is not an island - it takes place within a huge macroeconomic environment, with its own climates, trends and patterns. While looking at the immediate term minutiae is important - like what your share price and competitors' stock prices have been doing recently - it's also important to have an idea of what headwinds and tailwinds are facing the stock market as a whole in the longer-term.

Macroeconomic analysis ahead of the earnings period is another way to gain valuable context on industries and even stock exchanges as a whole - which will almost certainly affect your chosen company's stock price too, one way or another. This big-picture approach includes analysts and other market experts' forecasts during earnings season, looking at recent performance of that industry's bellwether stocks and also keeping an eye on the headlines going into earnings season.

Have a clear exit strategy and a risk management plan

No earnings report strategy is complete without a firm idea of how much profit you wish to make on your stock positions if your predictions are correct, as well as how much loss you are comfortable with weathering if you're incorrect.

A risk management plan is also vital. For example, when opening any trades, ensure you use risk management tools like a stop loss and a take profit order before opening any positions. This is always important, but especially during the volatility and significant price swings that are common during the publication of earnings reports.