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Equity trade tactics investors should master to thrive

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ChrisWeston

Summary

  • Typically those who choose to trade earnings look at their history and whether shares have had outsized moves over multiple quarterly earnings periods.
  • Traders look for companies that have a history of beating/missing expectations and if the share price moves in alignment.

When it comes to trading equities, very little trumps US quarterly earnings in its ability to drive volatility at a single stock level, with reduced correlations and increased dispersion within an index.

For traders wanting to trade US quarterly earnings or perhaps hedge their underlying exposures, share CFDs (Contracts-for-difference) allow active traders the ability to express a view on the direction of a share price.

However, if one has the risk tolerance and their strategy dictates then share CFDs incorporate leverage and the ability to go long or short, which can greatly change a trader’s approach and control to trading price moves in stocks.

It's through US quarterly earnings where the market gets to see the reality of a company’s financial health versus what’s been expected, and whether the outlook that the market has discounted into valuations is one that is portrayed by the company.

The divergence between the company’s outlook and market positioning is where we often get short-term volatility, especially if a share price has had a big move into the earnings and a lot of that speculative positioning is unenthused and will need to manage that position.

Trading around news can be challenging, but traders will try and skew the probabilities by looking at a company’s pedigree at earnings and whether the company has a long-forged history of beating or missing expectations – names like Apple, Intel, Facebook, and Alphabet are market darlings when it comes to beat earnings expectations and do so time and time again.

However, earnings pedigree is one aspect that can install a sense of confidence, but there are so many more considerations than just beating earnings and sales estimates.

Investors live in the future, so the vision, the guidance and the expected operating environment can often be far more influential for the share price reaction than the numbers seen in the reporting quarter. .

Typically those who choose to trade earnings look at their history and whether shares have had outsized moves over multiple quarterly earnings periods.

For example, in the past eight quarters, Facebook, averaged absolute moves of 5.2 percent, while Netflix and Twitter average absolute moves of 6.3 percent and 12.5 percent respectively.

Traders look for companies that have a history of beating/missing expectations and if the share price moves in alignment — life is far simpler like this.

For example, Apple and Amazon have both beaten consistently on expected EPS and sales, yet have subsequently fallen on the day of earnings for four straight quarters — will we see a fifth straight quarterly loss on the day of earnings?

There are many other examples, but one could argue when a stock is priced for perfection that the company not only needs to beat expectations, but it needs to truly inspire.

So, traders want a pedigree of exceeding expectations, they want movement and importantly they want to know whether there is a trend in the share price performing well or poorly on the day of reporting.