Earnings season is upon us. This week in class, we watched the market’s reaction to the earnings releases of Infosys and HDFC among other companies. While my students and I were eager to trade the impending volatility from the news release, we did not want to put our hard-earned capital in harm’s way.
Trading is speculation. Speculation in the markets requires skill. In speculation, we have a very high probability of being right due to our knowledge of the markets and price reading. Additionally, we do not have to lose it all if we are wrong as stop losses can minimize the damage to our accounts.
Trading before earnings is extremely risky. You may think you know what the reaction will be to the announcement, but until the markets digest the news, there is no way to be certain. Entering positions before major market announcements is a sure way to lose a lot of money.
Now, many traders argue that if you try and jump on the movement just after the announcement, you could make lots of money since the price moves very fast. The truth is that by the time you would get your order into the market and executed, you could very well enter at the end of the move. There is a much smarter way of trading the announcements that increases your odds and doesn’t violate the principles taught at Online Trading Academy.
Look first at Infosys. On 12 January, they released earnings just as the markets were set to open. The earnings met expectations, but the forward looking revenue forecast was poor. As would be expected, there was a mad rush for selling at the open. If you were trying to trade short on the open and happened to be lucky enough to get filled and exited at the low, you could have made Rs. 90 per share. But, let’s be realistic; what were your chances? Looking at the one minute candle chart, there were a lot of people who got in later on the second candle and may not have known where to exit in time before prices turned up. Your real profits would have been much smaller.
The better trade with less risk was to wait for all of the rush to die off and enter into INFY based on supply and demand. The patient trader that did that was able to reduce risk and still make a handsome profit!
HDFC’s earnings could have been even worse. There was a wild gyration of price before it took off upwards. In class, we watched as the amateurs were shaken out and calmly entered at a test of broken supply that was now demand to offer a low risk/high reward trade!
So, don’t be so eager to trade before or just after the announcements. Wait for your better opportunity on the retest. You are a speculator and speculators don’t take uneducated risks.
– Brandon Wendell firstname.lastname@example.org