How To Trade Stock Market Earnings Reports! My Simple Trading System!

Again I am going to link the YouTube video in my Blog so people actually have to put in some effort.

The YouTube video for this post is HERE!

What are earnings reports?

Earnings reports are released by public companies every quarter included in the earnings report will be net income, earnings per share (EPS) earnings from operations and net sales. Basically how the company is doing overall. Are they making money or losing money, successful or not? That is simple enough right?

How to read an earnings report?

How do we know what is going to happen? Here is an example of an earnings announcement.

NOTE: Not the earnings report but an announcement of what the report is expected to be

According to Zacks Investment Research, based on 8 analysts’ forecasts, the consensus EPS forecast for the quarter is $19.21 The reported EPS for the same quarter last year was $19.01.

So according to the analysts the stock will go up because the Earnings Per Share is higher this year’s quarter than the previous year’s.

Simple right? Well yes and no. Yes, because that is usually what happens if the analysts’ are correct and no because if the earnings report under-performs or outperforms the analysts’ expectations then that will probably change the outcome. Got that so far? Good. Wait, wait don’t go and start buying or selling on what the earnings reports and the analysts have said there are a few more conditions to be met first.

So how do you use this to make a trading system?

There is the market itself to consider. Usually I am trading earnings reports from the NASDAQ so the NASDAQ itself should be going in the same direction. Or NYSE, LSE whichever exchange the stock is trading on. The stock should be going in the direction as the exchange.

The Three Rules!

1. The stock is trending up when the exchange is going up and in a downtrend when the exchange is also dropping. The trend must be ongoing for at least a week to be called a trend. If there is no trend for the week time period then look at the one month trend.
2. The report is also going in the same direction as the trend and the exchange. A positive report for an uptrend in the exchange and in the stock. And the opposite if the earnings are negative, a down market on the exchange and a downtrend in the stock. To put it simply all three are going in the same direction. If they are not all in the same direction then it is a NO TRADE!
3. Pre-market trading agrees with the report. Green for a positive report and red for a negative report. If the Pre-market is jumping around and going from positive to negative etc then it is a NO TRADE! After hours trading in the same direction is an advantage but not essential.

If all three of these conditions are met then there is a high probability of a successful trade! Understandably you are not going to get many trades using this system during normal times maybe one or two decent trades per week but that is usually enough but sometimes there will be zero. During the earnings report seasons expect a trade almost every day! These times are March, June, September and December. There are earnings reports in all months though so keep an eye out. This trading system is just another tool to use in your arsenal. Rule one can be relaxed if the other two rules are met but this decreases the probability of the trade. I have found that rule 2 and 3 are essential for success!

Thanks for reading!

The Earnings Trader

Paul Davids