One of the important things that a trader should do often is a review of their trading process – looking for any areas that may need an adjustment. However, there are times during the year where I think this really is mandatory and one such time is earnings season.
With so much activity in the first month of the quarter, I have found it easier to lighten up my Swing and Long-Term positions so that I can focus on one type of trade: the catalyst, the earnings trade.
Some of the adjustments that I make:
- I run my typical scans, but I build much smaller watch lists. Since I do a fair amount of post-earnings trading, I find that my “to fade” list gets a little beefier.
- I increase my cash positions in each account so that I can be much more opportunistic with the reaction to earnings.
- I become a lot less loyal to stock – meaning I have less of a bias when doing short-term trading. I find that the opportunities can often be in both directions intra-day so I do more U-turn trades. I don’t like to fight the market in this area.
- I have done a review of my option use, specifically with the initiation of Collars, and don’t see any real adjustment needed here beyond the timing for when these get put on (I have noticed that I was putting them on a little earlier than I should). I will continue to have this as a key tool I use to protect a position but also use them so that I can be more focused on the short-term trades that I do.
- A larger percentage of my time goes to the work I do in tracking earnings information, both before and after the event (catalyst). It is my belief that this increased effort during certain times each quarter is what allows me to be more in-sync with the other market participant that may also be trading a particular stock post-earnings.
One final comment here. I certainly am not advocating that each person must make adjustments as some may argue that “if it ain’t broke, don’t fix it”. This is just what I do and would expect this process to continue in the future.