One thing you'll learn about me if your new around here, is I always take profit early. Well sometimes, but it feels like always.
Make sure to be happy with the choices you make and don't just follow me. I am only telling you what I am doing and this is not a suggestion or recommendation for you to do the same. I am not an investment adviser.
This is how I trade earnings and manage risk. I hope this helps those of you who enter a trade without a plan.
Someone asked me this week if they should close an earnings trade at a loss before earnings. To me their loss was small, but to them it may have been huge.
Each one of us have different sized accounts, different thoughts of how to trade, different fears in trading and different ideas of how much profit will make us happy.
I can't trade your account and you can't trade mine. We each have different styles for trading. You may find my way dumb and I may find your way crazy. LOL.
It is really hard to tell someone when to close a trade. Maybe we can give them ideas about how to work their way out of the trade, but until you are them, you really don't know what they can tolerate for risk. I guess if you have to ask, you have past your level of comfort or do not have a plan.
I would think each of us has a risk level we are comfortable with and if you don't know yours, you should find it quick. It will help save you from blowing up your account(s).
You may also put all your account on one trade and one entry, or a partial part of your account on one trade. So it is always hard to say when to close a trade. Each of us should have our own style and already know what we are happy with before we enter a trade.
The one thing about being happy and comfortable with risk is you will most likely not get rich quick. You will just accumulate over time. But your account should be safer.
If you want to get rich quick in the market, which does not happen often, take wild trade sizes, but most likely you will blow your account. Newsflash ....Especially with earnings trades.
I trade expecting to loose, but plan the trade to win. That is my style.
Again everyone has their own style and I found mine and wanted to share it with you. So here is how I trade earnings and manage my risk. This is almost a built in principle which I will rarely sway from. Maybe it will give you some ideas for your own trading.
This is how I trade earnings.
1. Expect any earnings trade to move $10 or $20 or more in either direction, so all I can say is prepared before you buy for what you are comfortable with loosing.
2. I do plan on holding trades that are at a loss before earnings. The trades that I take which are at a loss before earnings, I plan to hold on too and work my way out of after earnings, by holding and averaging in. If they do not go back in profit at earnings. But they have to fall far enough to make it worth adding too them. Otherwise I watch them float back up to the surface or close them if they are a real dud.
The only reason I think I have closed an earnings trades at a loss before earnings is because I have heard news such as an executive order for health care or N. Korea news, etc which were all bad decisions on my part as the trades were manageable and profitable after earnings. I am trying to get my emotions under control in situations like that and not close when news like that happens. There may have been a few that were duds I closed early, but not many.
3. An easy principle I have found for trading earnings is if I wish to enter a trade, plan two entries, one before and one after the earnings report to average in, in case anything bad happens.
This is not total account size-this is only for one trade.
Trade size examples.
Trade size $500, $150 1st entry and $350 after if needed. Trade size $1000, $300 1st entry and $700 after if needed. Trade size $5000, $1500 1st entry and $3500 after if needed. Trade size $10,000, $3000 1st entry and $7000 after if needed.
I always stay with a 30%/70% principle. I will never just take one large trade. I want a chance to still make money, if price goes the wrong way. These are earnings trades and anything can happen.
For options, I normally look for a .40 call or put with a delta of 20 or more with a 7 day expiration or more. I hate options and I do not trade them often. If you are wrong on earnings, they are a lotto and go to zero.
One very important principle for me is I do not use stops on the first entry. This freaks a lot of people out, but how do you set a stop on an earnings trade, that will have the chance of getting hit. I will add a stop on the second average add too the trade entry if that happens.
And why do I say principles? Rules are meant to be broken, but principles are not. So many people move their stops, so why have one?
Earnings for me is not a lotto ticket to riches. It is a well thought out plan, with an easy setup.
I hope this helps.