Earnings Season Survival Guide: What to Do (and What to Avoid) in a Volatile Market

This earnings season, I need a neon sign above my desk with the message: price action is the truth.

Stocks can sell off on good news. They can also go up on terrible news.

It is very easy to explain after the fact, but the truth is that there are myriad reasons as to why a stock can move. There is never certainty and always incomplete information. The goal of studying catalysts is to filter the market, build context, and try to frame events that the market may care about. It is NOT an exact science that is directly correlated to the subsequent intraday change.

It is the price action that pays.

Being stubborn during reporting time will get you crushed. If I could think of the most common flaw for traders it is freezing in real-time and the inability to process what the market is telling you. Sometimes it is hard to let go of the detailed preparation and biases formed before the market is open. At other times, the volatility is so sharp and sudden that the price blows through stops leading to an inner dialogue of “surely this comes back”. It rarely does.

The solution is to accept uncertainty and randomness. This can be better targeted through preparation and mindset training ahead of time.

The goal of this post is to serve as that plan for the upcoming weeks. It is not necessarily the right method but what has worked for me through years of tinkering and experience. These are messages that you may be able to integrate into your trading. The work has to be done now for it is a certainty that such volatility is coming, but this does not necessarily equal opportunity.

Action Steps:

1. Build an earnings playbook

A trading system is a structured method designed to minimise guesswork and emotional decision-making. It is a set of rules that guides you on which stocks to trade; when to enter; where to exit; how to manage them; and how to manage one’s risk.

This is particularly imperative during Earnings with so many flashing lights. What is your method for selecting stocks on those heavy news days? How will you manage gaps and the potential slippage? Do you trade morning drives or enter later in the day? Will you fade gaps for mean revert? Can you manage multiple positions and the subsequent risk across them all?

I have found that my strengths are not aligned with executing Day 1 news plays early in the day, especially on big gaps. This requires fast order book skills and expert match reading. It is a setup more suited for scalpers. The price action post-open is often erratic with less trend. This may be because the market is more informed and increasingly efficient during reporting.

Here are some February 2024 examples of stocks that had strong catalysts I liked, yet their excessive gaps and choppy action made them tricky to trade:

AGL

Gap of 13%

BLD

Gap of 7.2%

TPW

Gap of 7.7%

SEK

Gap of -11.7%

This is not to say that you cannot get nice intraday trends nor does it mean following strong gaps does not work. Here is some more data from February 2024 to study and reverse engineer for the keen ones amongst you:

(R = reporting day. %R Close = intraday move open to close)

The cleanest setups for me are wider timeframe and Day 2 strategies. I have spent a lot of time backtesting and refining these to create clear rules. These playbooks look to take advantage of momentum and EPS revisions. They better suit my strengths.

Know where you have an edge and build rules to navigate you.

2. Be prepared and focused

The quality of your results will reflect the level of your preparation.

Have tools ready to assist decision-making. These can include calendars, consensus numbers, broker flash notes, AI, or a well-functioning team to help digest the news.

Prioritise your time and filter. Block out distractions and notifications during preparation.

Automate where possible to plan the entry, size, and stops. This takes away discretion and increases bandwidth.

The most important process is to close the loop BEFORE the market opens. This means checking in on yourself and the game plan. Visualise what you want to see and rehearse IF/THEN statements. This makes it easier to execute in real-time. The mental state you don’t want to be in is scrambling right before opening with multiple tickers on depth screens.

Calm, focused, prepared, and process-orientated trader.

3. Increase trade selection

Doing less is doing more

You only need to maximize one of two names to put up a truly good monthly score. Where most come undone, myself very much included, is trying to be across everything. This leads to loss of focus and feelings of being overwhelmed.

Only by filtering can you execute to the best of your ability. Who cares what everyone else is doing or what other random stocks are moving? It is out of your control. The solution is to focus on just a few stocks from your planning and accept you will miss some action.

Check in. Write. Slow down.

4. Be ruthless with stops

Again - price action is the ultimate truth.

As a trader, there is no time for a fundamental bias with the amount of flows that are being put to work. Our job is to make money.

Have a game plan pre-open and then be prepared to throw it all away if the market doesn’t confirm. The stop should reflect where the idea is wrong and where the position will in aggregate move against you. Thus, it makes no sense to not get out of everything in one go.

One outsize loss can do so much damage to the entire month. It also puts you on the back foot and in a negative mindset. Visualise where the trade is wrong and hit that stop.

5. Focus on the strongest

The market rewards just a few names with multi-day re-rates. This is where you want to spend your energy going with the new flow and new positioning.

Trading with the wind at your back is so much easier.

Track these stocks via data, watchlist, and alerts. Drop down a timeframe to wait for your underlying setup. Make life easy on yourself rather than fighting.

Identifying the early themes and tone of the season is crucial. The market may reward one sector; it may punish misses or it may look through. Use the information from the early patterns to scale through the weeks ahead.

That’s the job of a discretionary pattern recognition trader.

What To Avoid: