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Factors to Avoid - Earnings

 

 

As a candlestick trader, your main focus is analyzing charts. Your mastery should be in understanding what the candlestick signals mean and how to effectively use them with western technical indicators. You are always trying to find situations which show distinct price patterns which have led to high probabilities to generating profits in the past.

Traders should accept the fact that most of us do not have the time, nor the resources to do extensive fundamental analysis of companies. Neither is trusting the analyts on TV an acceptable solution. What traders rely on is the price action in the charts. Candlestick traders have the distinct advantage of visually seeing the demand-supply play out on the charts. But candlesticks do not give fundamental analysis research. Any investment sentiment altering news will distort the technical picture of a stock.

Profitable Candlestick Charting strongly urges candlestick or any trader for that matter, to avoid being in any position (unless hedged) for which a fundamental news is about to be released. The biggest fundamental news event is the quaterly earnings for each company. Very many traders have lost a fortune trying to play the charts naked (long or short) just before earnings. There is no way to know before hand how the reaction of the investment community is going to be. It is one thing to be invested in a company long term based on fundamentals alone (though we do not agree with this approach). But for a trader, earnings can be a nightmare.

The correct approach for a candlestick trader is to either play the stock and get out the day before earnings or analyse the candle formation after the earnings and play it from there.

The following chart shows YHOO getting drubbed on earnings release. Notice the chart was very bullish forming an ascending triangle and getting very near the expected breakout point. It had formed a bullish engulfing signal giving traders the opportunity to ride a profitable trade. Then came earnings and Wham!

Lesson- Avoid earnings play. There are plentiful other signals each day to choose from.

Chart courtesy stockcharts.com