How to profit on earnings reports?
Making profit on Forex can be difficult in some cases, but this is not the one. Actually, trading on companies' earnings and trading on the news from the Forex economic calendar have much in common.
The forecast about the scheduled earning figures is prepared by analysts several weeks before the earnings season starts. Analysts usually make predictions upon EPS (earnings per share) and revenue, and this information helps in predicting a direction the market is going to move in.
What happens after the forecast publishing?
The forecast publishing, consisting of estimates and expectations, works as a trigger, which sets the price in motion. If the forecast is good, it motivates the stock price to go up. If the forecast is not so good, the stock price declines.
How to make a deeper analysis of a company?
If you are interested in trading stocks of a certain company, you can always get additional info. A small tip: just search on the net the investors' relations with the company you are interested in, and you will see the earnings release, the data of previous reports and other important info.
What happens after the earnings release?
The suspense around the data release stirs up the interest to certain stocks. The bigger the difference between the forecast and the actual reading, the bigger the movement in the market it provokes.
Nevertheless, the unspoken rule tells: 'Buy the rumour, sell the fact'. That means that the price for stocks can decline after the news release, because the prices turned out to be good, and investors who bought the stocks before the release started selling them right after.
Have a look at the chart above where Tesla stocks plunged by about 10% on April 3, 2019, to get an idea on how the stock price might move on the earnings report.
The company's quarterly revenue turned out to be lower than expected and that caused an instant decline. Pay attention to the fact that the Tesla stock price was constantly rising before the earnings release.
Mind the Media while trading on earnings reports
Smart traders know that you should not only consider the company's EPS and revenue but also implement the fundamental analysis, to see the bigger picture.
Follow these points to trade on earnings successfully:
- Look at the traded stock performance within the last two weeks. Make a comparison of the actual performance of the price and the predictions. If the actual price is too high, be prepared to sell stocks with the news. If it is too low, get ready for buying.
- Find out, what was the market reaction to the previous releases. The history can tell you about the peculiarities of a certain stock price behavior.
- Check RSI, a technical indicator that can show whether the market is overbought or oversold. When RSI is high, that indicates the stock is overbought and is possible to decline. When RSI is too low, it signals the stocks are best for buying.
- Media can help you to see the bigger picture. If a particular company and its expected profit are much talked about, the stock price must be high and vulnerable to a selloff. If there are negative comments about the company, the stocks may turn out to be undervalued.
What factors influence the stock price?
The news that comes from large companies usually influences the stock market significantly. Moreover, news of one company can influence other financial instruments besides the stocks price, and even the currency rates. Thus, if Amazon or Microsoft stocks rise, S&P will probably go up, too.
How the stock price influences currency rates
The currency exchange rate can react to the changes in stock prices as well. If a prominent company's stock price rises, the demand for a currency, in which the company's stock is related may increase because investors suppose the Central bank rates may rise.
Generally, if forecasts work well, the stock price has all the chances to reverse, compared to previous dynamics. If the reading overshoots or undershoots the forecasts on a big scale, the overbought and oversold market is able to correct up or down in case if the data is positive or negative.
What are the major economic reports?
Of course, most reports, like Non-farm Payroll, have overall influence to the world economy. People from different parts of the world equally anticipate releases of countries GDP, companies earning reports and bank interest rates, because these factors influence different assets price considerably. Moreover, some reports releases even cause volatility. So, to find out the major economic reports and news for the instrument you trade, find it in economic calendar, like the one on investing.com, apply filters by country, sector and importance, and use analytical data to prepare your trading to news release.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.