Earnings season produces some of the biggest single-day moves in individual shares. A company can rise 15 per cent or fall 20 per cent overnight on a set of results. For anyone holding a position, that is both the attraction and the danger. One of the most common mistakes traders make is drifting into a results announcement without having decided what they are trying to achieve.
What the mistake looks like
It usually happens by accident. A trader buys a share for reasons that have nothing to do with results, perhaps a chart pattern or a sector theme, and forgets that the company reports next week. Or they know results are coming and simply hope for the best. Either way, they end up holding a position through one of the riskiest moments in that stock’s calendar without a plan for what happens next.
Why results are different
Gaps. Most large companies report outside normal trading hours. That means the share price does not move smoothly from the old level to the new one; it jumps. If you had a stop-loss in place, it may be filled far below where you set it, because there was no trading in between. Our piece on gap risk explains why stops do not protect you from gaps.
Expectations, not just numbers. Shares react to results relative to what was expected, not in absolute terms. A company can report record profits and still fall if investors expected more, or if its outlook for the next quarter disappoints. Good results are not the same as a good reaction.
Guidance. The forecast for future quarters often matters more than the quarter just reported. A small change in guidance can outweigh a big beat. Our guide to earnings guidance explains why.
Implied moves. The options market usually prices in an expected size of move around results. If you are holding a position sized for a normal day, you may be carrying several times your usual risk without realising it.
Why traders fall into it
Partly it is simply not checking the calendar. Partly it is optimism: if you like a company, it is easy to assume its results will be good. And partly it is reluctance to sell a position that is in profit, in case the results send it higher still. That mix of hope and fear of missing out is exactly what a plan is meant to replace.
What a plan looks like
A results plan does not need to be complicated. Start by knowing the date and time of every report for every share you hold. Then decide, before the announcement, which of three choices you are making.
You can close or reduce the position beforehand, accepting that you might miss a good move in exchange for avoiding a bad one. You can hold deliberately, with a position size small enough that a large gap against you is affordable. Or you can stay out and wait for the reaction, then trade the new information once the price has settled.
None of these is right in every case. The point is to choose consciously and size accordingly, rather than finding out after the fact. Our explainer on the mistake of risking too much per trade is useful here.
A simple check before results
Ask yourself: if this share opened 15 per cent lower tomorrow, would that loss be acceptable within my rules? If the answer is no, the position is too big to hold through results. Write the answer down before the announcement, not after.
The bottom line
Holding a trade through earnings is not a mistake in itself. Doing it without knowing the date, the risk and your reason is. A few minutes of planning turns a gamble into a decision. If you want a clear picture of how disciplined your process is around big events, take the free Samuel & Co Trading Trader Assessment.
