How do i make money when a company reports its earning on the stock market?

Discussion in 'Investing and Retirement Saving' started by james oduor, Nov 17, 2015.

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  1. james oduor

    james oduor Newbie

    I've noticed that certain companies on the stock market either jump or fall significantly when it reports its earnings, is there any way to take advantage of this move? I've heard something about directional trading and was wondering if anyone had done this before and made a profit? Look forward to some golden nuggets of advise!
    Miles likes this.
  2. Miles

    Miles Newbie

    If you are not too sure which way the stock price of a company will go before it reports then there are ways that you can make money. There are savvy investors who use directional trading to make money on stocks that are potentially going to explode in a certain direction. With directional trading there is no risk if the stock goes up or down the only requirement is a large movement in a short period of time.

    The first thing that you have to do is make a list of all the companies that are reporting every quarter. Once you have compiled the list you need to do some research to see which stocks move the most when it comes to reporting. Some stocks move up to 20% when they report and make money for investors regardless of the direction they move in.

    Once you have found a few stocks that are reporting soon you need to place a directional trade on them. You have two choices when it comes to directional trading, you can use CFD’s (Contracts For Differences) or you can use options. Once you have assessed the risk reward on each on the instruments you can decide which one you want to use.

    If you decide on using CFD’s you need to place a long position and a short position on the reporting stock. Once you have placed the positions you need to place guaranteed stop losses on the stock. Try and find brokers that offer guaranteed stop losses that kick in when the stock moves 2.5%, by using a tight stop loss one position will be closed once the direction is determined. If the stock has reported well the price will rise and the short position will be closed automatically once the 2.5% stop loss is hit. The stock needs to make a move greater than 2.5% in a certain direction to make money.

    You can also use options to utilise this directional trade, using options this strategy is called the straddle and many successful traders are making significant profits using this method alone. Once you have decided on the stock you need to buy a put and a call at the strike price closest to the actual price. With options you will not need to place any stop losses as you cannot lose more than you have staked at the beginning. With options you have to take in a lot of variables to work out how much the stock has to move to make profit, normally it is between 5-10%.

    Directional strategies are great if you want to make money regardless of how the stock moves. The only drawback is that the stock cannot move sideways and needs to make a significant movement is a distinct direction. With proper research and exact strategy implementation you can make a lot of money using this strategy, before you try this strategy it is imperative that you undertake some virtual trading so that you can get some invaluable experience.
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