Welcome to second-quarter earnings season. The next three weeks of reports, surprises and disappointments will increase both opportunity and risk for traders and investors.Unfortunately, most of us will get caught up in the excitement of this volatile period and make really dumb mistakes. We'll also fail to grab onto the low-hanging fruit because we're hypnotized by facts and figures and frozen by fear of the unknown. The best strategy in the next few weeks is also the hardest one to follow if you're vulnerable to the gambling side of the trading game. Simply stated, play a stock aggressively into the minutes ahead of an earnings report but get out before the numbers are actually released. Then, after volatility dies down, examine the crowd's reaction and trade back into the position, if it still shows a good opportunity. You heard that right. I said to get out of the market before the company actually releases its report. This small detail stands against the babble promulgated by analysts in chat rooms and on stock boards. It also goes against our hard-wired gun-slinging mentality that falsely claims we're smarter than anything Mr. Market can throw at us. In truth, neither technicians nor fundamentalists can accurately predict price direction after an earnings release. This unknowable element exposes naive market players to unmanageable risk and career-ending shock losses. Since legitimate traders are not gamblers, we have no alternative but to step aside and let our competition play into the report and initial price swings. Of course, the majority of the trading crowd believes the market is little more than a roulette table in which fortunes are made picking the right numbers at the right time, but nothing could be further from the truth. Our solitary legitimate goal is to take risk only when it can be quantified into measurable dollars and common sense.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
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