PLEASE NOTE: this is just my opinion. I know a lot of people who LOVE trading earnings and can and do have some pretty good results. If you trade earnings, that's awesome, I just always say no matter what or how you trade, just have a plan and stick to it! But for me, earnings just doesn't fall into my game plan. I used to trade earnings with some up and down results and finally came up with a game plan and stuck to it -- COMPLETELY forget about earnings! And, if anything, trade POST EARNINGS, not PRE-earnings. Ever since, my consistency has increased.
Yes, I understand there are many viewpoints here, i.e., great to capture volatility crush by selling; ability to capture huge move with little risk lotto. Yea, you can bank pretty good if you get an earnings right, but there are so many factors working against you that I would rather trade 10 consistent trades with a higher win percentage compared to making 10 trades with the hope that fate is on my side for at least one or two of them. So, this is why I think post earnings can better set you up for more sustainable, consistent profits.
I've attached an image of Netflix. With their recent earnings, figured I'd just use them for an example. To help illustrate, I'm using the Oct. 16, 2019 earnings.
So, what is my set up for earnings? ABSOLUTELY NOTHING! I trade wave theory and supply/demand. Let's walk through this hypothetically .... Pretend there is NO such thing as earnings for this...
It's beginning of October and I want to make a trade in Netflix. I go chart it, find supply/demand, and low and behold, "NOPE, not entering a trade yet. We are currently in a chop zone. But, based on my game plan, I will WAIT and LOOK TO SHORT at the 300 supply zone OR I will WAIT and look to enter a LONG position at the demand zone around around 268."
Game plan set, set some trade alerts/price alerts, and now wait. Oh, Oct. 17 I get an alert Netflix has entered a supply zone. I go, check out price action, and potentially decide to enter a short trade because price for some reason rocketed up to a BIG supply zone. I enter a short and stick to my game plan until invalidation level. Well, Oct. 18 rolls in and the stock has now dropped by end of day from 308 down to 273! Let's say I lock in some profit and I close all positions. I have now followed my game plan up to this point with no consideration as to what, why or how price entered my target zone. My main thing is to find my entry zones and WAIT until price gets there, no matter the reason of how.
Now, after I close out, I re evaluate. Oh, look at that, there is a BIG DEMAND zone down at 265 area. Guess what, another trade alert set and then it triggers. I go and review price action and see that there was a WHOLE LOT of selling directly into demand. Sweet, a confirmation signal I look for. So, lets say I now enter, according to my game plan (short supply, long demand), I enter a long position at 268. Well, as you can see, sticking to my game plan and the general concept of powerful moves being able to come out of demand, price trended all the way up to 338. Lets hypothetically lock in those gains and move on to the next trade!
...... Well, happens all the time, but lets say someone asks, "OMG, did you trade Netflix earnings? I made a killing on the pop up! (or lost on the surprise beat)." My response: "ummmm I didn't even know there was earnings...."
My game plan: less stress; putting odds in my favor; potentially made some awesome swing trades for a total point value of about 110 points! Person who traded earnings: stressed; ears and eyes locked onto the news; fingers crossed that the $100 lotto/gamble they made will pay off and hoping that fate is on their side.
Funny thing too to help illustrate the horrendous odds of earnings ... this earnings report posted a surprise BEAT; so, rightfully so, the price rocketed right up! However, that rocket landed SMACK DAB in a supply zone. So, to the person trading earnings scratching their head as to what the heck happened to the stock after posting such a great report??? Well, lets look: you bought in a chop zone where the market was already indecisive of where to go and the report did nothing more than to SPEED UP THE PROCESS of helping the stock price either go to a demand or a supply zone. Here, earnings, I suppose, just helped to accelerate time a little bit and pushed it straight to supply. Once it got there, there were a whole lot of sellers waiting to just dump their holdings. And, ironically, at the same time, you have all of your Earnings "Winners" locking in their profit, also dumping off their holdings.
Result = good earnings report > massive price swing to the negative
If this is too long, I apologize. I just hope this makes sense and hopefully helps to illustrate to people my reasoning as to why I don't trade earnings. Seriously, I couldn't tell you when an earnings report is on any of the stocks I trade. The only time I look to when earnings are is to help me decide how far out in time to purchase or sell my putts or calls. Meaning, if I was going to buy 6 weeks out and find out that that expiration lands right on earnings, then I will SKIP THIS DATE and go out maybe 8 weeks or go shorter to maybe 4 weeks out BECAUSE I do not want to buy elevated implied volatility due to an event that has absolutely no bearing on how I trade.
Let the trade set-up establish itself FIRST; don't trade hoping for a set-up to happen...
@PT_Marche , Not too long - Excellent write-up! thanks for sharing.. that's how we learn from each other and it's precious experience you're sharing here.
pls keep it up!
PT_Marche
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@RedKTrader, Thank you! I appreciate the comments! I agree, being able to learn from each other is very important. I'm always doors wide open too and never will be negative towards someone that completely disagrees with some of my projections. I mean the market does what it wants to do and it's impossible to catch everything alone, but maybe that other person did!
inteist
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Great stuff!
Please expand on how you personally go about identifying supply and demand zones – what techniques, timeframes etc.. you use to get the best results for S/D zones.
Thanks.
PT_Marche
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@inteist, sorry for the late response. I had to take care of some family stuff and getting back to it now. I will say, identifying zones can be VERY subjective, and, when applying it to your own risk profile, can make it even more subjective / different than when comparing to someone else's. In general, a higher volatile stock, say Tesla, I usually look at a HIGHER time frame, i.e., Monthly / Weekly / Daily to identify zones. A smaller volatile stock, say Intel that doesn't swing by $70 a day haha I go from Daily / 4 hours / 2 hours / 1 hour -- sometimes even down to 15 minutes if intraday trading.
Good rule of thumb I look to is how long do you want to be in a trade? Just a day or two? I look at smaller time frames and lock in profits quickly if they come. If I want to hold a trade a lot longer, say 1 - 2 weeks, I will look at the Weekly and Daily (sometimes 4 hours) charts. For example with my Tesla trade I did earlier, I wanted to hold it for up to two weeks just before earnings came out. I looked at the Weekly and Monthly to identify my zones and bought in accordingly. Also, the larger time frames I make sure I go further out in time.
inteist
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@PT_Marche, thanks, appreciate the detailed answer.