4 Trading Tips for Earnings Season Success

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Earnings season is well underway this week as a bevy of high profile companies report their quarterly performance to investors on and off Wall Street. Penny stocks are hitting the headlines too – while they may not get the same media attention that’s granted to the likes of Goldman Sachs (NYSE: GS ) or United Healthcare (NYSE: UNH ). now’s an equally critical time for small-cap investors…

To be sure, trading in this environment requires special attention – after all, earnings season is notorious for increased volatility as the market absorbs the latest earnings news. Here’s a look at four trading tips that could mean the difference between a botched trade and earnings season successes.

1. Watch Earnings Call Dates, and Trade Your Plan

Whether you’re a long-haul fundamental investor, a short-term technical trader, or some combination of the two, the key to success in the markets is to trade according to your plan. That means embracing your strategy, and looking for “high-probability” trade opportunities.

That all changes when you invest in a stock ahead of earnings…

Earnings season adds a considerable amount of event risk to your portfolio. That’s because strong earnings or a major miss can have a potentially massive impact on a stock’s share price. That’s especially true now, when increased market volatility means that those moves can be illogically large.

Unless you have an investment strategy that specifically uses the risks of earnings surprise to your advantage, it’s a good idea to be cautious about buying (or shorting) stocks ahead of earnings.

2. Don’t Forget About Market Holidays

Even if you’re planning on closing out a position ahead of earnings, unforeseen factors can work against you. Take market holidays, for example – forget that the market will be closed, and you could be forced to hold over earnings.

I’ll admit, that exact loss-inducing goof has happened to me in the past…

Once, I put in an options trade, planning to close out the trade ahead of the company’s earnings call. Unfortunately, while I was well aware of the market’s closure for a market holiday, I hadn’t factored it in when I originally set up my trading plan. Although I’d intended on selling the options ahead of the call (which would have given me a relatively nice gain), I got stuck holding calls during an unpleasant earnings call, and ended up closing out most of the position for a loss.

Sometimes, trading your plan isn’t enough – it’s also essential to readjust to meet the market’s irregularities.

3. Gauge Extended Hours Trading for Sentiment Swings

Because most earnings calls occur outside of trading hours, extended hours trading (which takes place before 9:30 a.m. and after 4:00 p.m.) can be an excellent way to gauge sentiment for fast-moving stocks.

Typically, pre-market and after-hours trading is a very good indicator of how a stock will move during the subsequent trading session. By taking a look at the direction and magnitude of an extended-hours move, you can generally get a glimpse of which way daytraders will be focusing on moving the stock. If you’re contemplating a long-side trade, a strong reaction to earnings typically suggests that you’ll do well to buy when the market opens.

On the other hand, a bad earnings day suggests that it’s best to wait for trading to shake out the downside on the stock before it’s time to buy. When you stay aware of the market’s predilections, you’ll be much better prepared to reap better entries on your trades.