How to trade stocks during earnings season

Earnings season on Wall Street is the most important part of the quarter for a company because that is when it must show its bottom line results to those who have already invested in their stock as well as prospective investors. All of the major financial networks gear up for earnings season because they know that is when investors will be paying the closest attention. Let's take a closer look at why earnings season may be a good time to trade stocks and make a profit, and how you should go about trading these stocks during this period.

Why is earnings season a good time to trade stocks? There are several important reasons that this time is a perfect opportunity for traders. The first and largest reason is the fact that there is a great amount of volatility in the stock market. Clearly volatility is exactly what a trader would want to see to create opportunities for a profit. In addition to this there is a great deal of liquidity in stocks that are reporting earnings, so one never has to worry about getting stuck in a position. Finally, since there are so many companies reporting earnings at one time there are times when a stock can fly under the radar and present a nice quick trading opportunity. These are typically not the biggest of stocks, but the mid-cap stock names.

How should you go about trying to make a profit during the earnings season? The first thing you must do is be completely prepared. Being prepared takes several important steps. Prepare yourself by looking into the history of the company you are considering trading. Does this company tend to surprise to the upside or is it a serial disappointer? Also understand what estimates the analysts have and exactly what the company is expected to report. The most important thing you should do before making a trade during earnings season though is understand the sentiment surrounding that particular stock. Is the stock out of favor or a hot stock? Sometimes the hottest of stocks run up until they report earnings and then sell on the news of earnings.

It is also a good idea to put tight stops in place when you are trading during earnings season. Stops may not always be a good idea, but during earnings season if something turns bad you could lose a lot of money in a short period of time. Finally, it's a good idea to remember that most often the future guidance from the company is more important than the earnings number itself. Wall Street is all about the future, so keep that in mind when you are looking to profit during earnings season!