The Earnings Drift trading strategy is a well-studied phenomenon. It is when a company posts much better-than-expected earnings and the stock rallies for days or sometimes even weeks following the announcement. Traders enter after the announcement if the price shows upward price momentum.
Traders then hold the trade until the momentum fades. Some trades will produce small gains, some will produce small losses, but others will produce monster gains.
While this article discusses stocks that jump on good earnings, it is also possible to use this strategy for shorting stocks that drop on bad earnings.
Here is an example of earnings drift. You also may notice some other technical patterns or trade setups, but the move starts out with a strong move up on earnings and then goes from there.
The price drifting/moving higher occurs after the announcement. So there is no need to buy before the announcement, and a trade is only taken if the price actually rises on the good news. This eliminates the “gambling” that occurs with some other earnings strategies that buy before the announcement.
It is a strategy with a lot of potential, and there are actually a number of academic studies on its effectiveness to produce above-average returns. Employing the strategy requires a few pieces of information.
- which stocks had earnings out
- what the earnings estimate was
- what the actual earnings were
- the difference between the estimate and the actual earnings
- and then checking to see if the stock was moving up on a better-than-expected earnings announcement
- The above are good to know, but the price action often says all we need to know: a big strong up move on the announcement
Free tools like Finviz combined with TradingView charts which show earnings (estimates and actual) right on the chart have made it easy to track this information.
Swing trading earnings is discussed first, and day trading earnings is discussed at the end of the article.
Finding “Earnings Drift” Stocks with Finviz
There are typically lots of opportunities during earnings season (times of the year when many companies are reporting earnings), and fewer when not many companies are reporting earnings.
You can use Finviz to scan for stocks that have had recent earnings, or that have earnings today or tomorrow before or after the bell.
You would then have to manually go through the list, but the nice thing is that with Finviz you can view all the stocks in chart format, so you can instantly see which stocks have started to move or are setting up how you like. If you have TradingView charts, you can open your chart settings and click on Events, and then click the Earnings box. This will post a little earnings icon on your charts. You can then click on the icon to see the basic earnings information.
Here is a very basic scan I set up to look for stocks with recent earnings on Finviz:
It only looks for two things:
- The stock had earnings in the last five days
- Average volume is over 500K
The charts are sorted by performance over the last week. So better-performing stocks over the last week (which includes the earnings announcement) are at the top of the list. Worse performing stocks over the last week are shown last.
Here’s how it looked on January 7, 2021. We know the earnings occurred in the last few days, so look at the far right of each chart to see how it reacted and how it is setting up after earnings.
Here is how the top of the list looked when I ran the scan on Nov. 3, 2023 when updating this article.
You could then add in additional criteria, such as Technical-Performance and then select Week Up, to only include stocks that have moved up, for example. This may help filter out some of the stocks that dropped after earnings.
You may also want to add in additional criteria to filter the list, such as:
- being above a moving average
- certain performance criteria
- over or under a specific price (avoid penny stocks, or only include penny stocks)
- other technical or fundamental criteria
- Under Fundamental: EPS growth qtr over qtr, and/or Sales growth qtr over qtr. Setting these to Over 20%, for example, can isolate companies that had a good earnings announcement relative to the same quarter a year earlier.
These additional criteria may be beneficial during earnings season when you have lots of stocks on the list.
You can also screen for stocks that have earnings out before the opening bell. If the earnings are positive, you watch for the price to move above prior candle highs and potentially trigger a trade (“trading” is discussed below).
Here’s an example from Feb. 8, for stocks with earnings on Feb. 9, 2022. I also added in an option filter for only seeing stocks above their 200-day moving average. Therefore, I only see stock in uptrends.
Or here is a simple scan from November 3, 2023 looking for stocks that had earnings before the opening bell today (scan was run at mid-day) with over 500K average volume. Stocks with the strongest performance over the last week are shown at the top.
Some pretty sharp movement going on at the right side of those charts following earnings that morning.
Want more swing trading strategies for stocks? I lay them out in my Complete Method Stock Swing Trading Course.
Trading Earnings Drift Stocks
Here are some ideas on how to create your own entry and exit signals for earnings drift stocks.
For any trade, we need to know how and when we will enter, and how and when we exit (both winning and losing trades).
Put out stop losses and cut the trades that don’t keep moving up. Let the ones that do move up continue to run; consider using a trailing stop loss, or alternatively get out when the momentum fades. I will discuss different types of entries and exits throughout this section.
Here’s a strategy that involves waiting for a trigger candle.
- Wait for a strong jump on an earnings announcement.
- We then wait for a pullback. This may take one day (day after earnings) or several days to occur.
- I want a pullback (could be just one candle). A pullback for this strategy is defined as any time a daily candle makes a lower high than the prior candle. The candle with the lower high becomes a “trigger” candle. When the price moves above the high of that trigger candle, enter long.
If the next day the price keeps dropping and the candle makes a lower daily high again, your trade won’t trigger and now you can drop your entry point to a cent or two above the most recent daily high/candle.
This trigger candle is ideally smaller than others around it because this keeps the stop loss small. If you trail the stop loss (discussed below) the risk is reduced quickly if the price moves higher after entry.
- You are entering when the price moves a cent or two above the trigger candle high. Place a stop loss a cent or two below the trigger candle low. Don’t worry, there is a chart below which shows these details visually.
- Consider trailing a stop loss below candle lows as they form (called an aggressive trailing SL). Alternatively, use a moving average or ATR stops. A moving average or ATR stops will potentially make more on stocks that really run. But these methods will also give back more profit when the price does actually reverse (compared to an aggressive trailing stop loss below candle lows).
- We should get another pop higher within several days after the initial earnings day rally. If it takes too long, not enough people are interested.
- This doesn’t only apply to strong earnings. The company may also have announced really strong revenue, a big order(s), an increase in users, or a partnership (not a merger) with another company. The news can be anything that is a surprise and bullish for the stock.
Here’s an example in RBLX, which had a big jump following its earnings announcement. The price gaps higher, then drops the next day, drops the next day again, and then you enter the next day when price rallies above the daily high of that small green candle (when price moves above the box I have drawn). Stop loss goes below the low of that green candle.
With this method, we sometimes may need to enter a stock two or three times. This is because the price can be volatile and may not always run right away. This is why having a small stop loss is favorable. It keeps the losses small. I wouldn’t use a large stop loss (to avoid small losses) because then it is much harder to have a favorable reward:risk.
For example, if your stop loss is 5% away from your entry, if you make a 20% on the trade (a decent but very realistic return) then you make 4:1 reward:risk. But if you risk 15%, and make 20%, you are risking almost as much as you are making. And if you lose the trade and have to re-enter, your losses are more than your gain (2x-15% losses vs +20% win)…but if you keep the stop loss small, you still make money even if you have to re-enter a couple of times (2x -5% losses vs +20% win).
15% to 20% is a very common amount for the price to run. You will see some stocks that run a lot more, but you will also find many stocks that run less. If your stop loss is too big, over time the average profit likely won’t compensate you for losses. Try to find trades with smaller stop losses (small trigger candle).
StepStone (STEP), which was shown at the top of the article, could also be traded with the strategy idea mentioned above. Depending on the entry, a stop-out may have occurred requiring a re-entry. If you used a moving average or ATR stops, you may have captured that whole big rally.
These are just ideas for entries and exits. As you look through earnings trades, also look for ways to fine-tune your approach to trading them.
PLAB provides a couple of entries as the price rose. The first trade didn’t amount to much, about 3%, or a 1:1 reward:risk (because stop loss was only 3% away from entry). The second trade snagged a very quick 9% (1.8:1) before triggering an aggressive trailing stop loss. For fewer trades, and potentially bigger profits, there is also the option to use a moving average or the ATR Stop indicator for exits. The chart includes both of these indicators. With these, the first trade would still be open and moving nicely at the time of this screenshot.
In regards to choosing an exit strategy. When market conditions are healthy (good or ideal) I am more inclined to use a moving average or ATR Stops exit. This is because the market is moving up overall and I want to ride the wave in a strong stock as long as I can.
When conditions are not great (bad or ok) I am more inclined to use the aggressive trailing stop loss (move it up below each candle low). This way, I may only make a bit, but I am also protecting my downside and getting out quickly while market conditions are more bearish away.
I discuss market conditions in my Swing Trading Stock Market Outlook article each week. The process of analyzing market conditions is also covered, in-depth, in my Complete Method Stock Swing Trading Course.
Day Trading Earnings Drift Stocks
Earnings announcements don’t need to be multi-day or multi-week trades. They can also be a few minutes to a few hours. Here’s one way to day trade earnings announcements.
- After the stock market closes for the day, run a Finviz scan for stocks in uptends that are reporting earnings before the open the next day or after the close of the current day. This scan is discussed above.
- Write down the list. Or better yet, have little charts of them set up for the next day.
- In the morning, those companies are going to report earnings.
- You can see how the earnings were by simply pulling up a chart on TradingView. Go into Settings, Events, and make sure you have the “Earnings on chart” option selected.
- Look for stocks that beat earnings, ideally by at least 25% or more. Do this by clicking on the “E” at the bottom of the chart. Make sure it is today’s earnings. All the info is on that little popup.
- Wait for the market to open, and the stock price must move higher.
- There is a longer-term uptrend (likely, based on the scan), now there is an intraday uptrend, and we had positive earnings. Lots of bullish factors.
- Wait at least a few minutes after the open before taking any trades. Consider using a 1-minute or 5-minute chart.
- Then start looking for entries on pullbacks (when the price starts moving up again). Or, the price moves higher, consolidates, and then breaks higher. You are essentially using the How to Day Trade Trending Stocks strategy, but with a bias to the long side based on the bullish factors that are occuring.
- Place your stop loss. These stocks can move quickly; control your risk.
- If the stock is selling off, don’t bother with it. See if any of the other stocks are pushing higher. Don’t buy a falling stock thinking it will bounce. Buy a rising stock after a pullback or consolidation, once it starts rising again.
- Try dividing capital between a few trades. One will trigger first, so apply some capital to that. Then apply some capital if another sets up. Sometimes none set up correctly. Sometimes many will set up and we basically take which ones we think will do well.
- Don’t risk more than 1% of the account on a trade. Typically risk will be less than this because our capital is getting divided up between a few trades (although you can risk 1% on multiple trades if using leverage).
- Profit targets, I leave up to you. ATR Stops, a moving average, an aggressive trailing SL, or a profit target (such as 2:1 or 3:1 versus the stop loss size) are all viable options.
These two tweets show the process.
Recently uptrending #stocks with #earnings out pre-bell. $CVS $CME $EQNR $ARCC $FOX If they have stronger than expected earnings, and move above the prior day’s high during the session, that’s an often tradable & sometimes explosive trade.https://t.co/FO0siEwM86 pic.twitter.com/WWIrK3pI9o— Cory Mitchell, CMT (@corymitc) February 9, 2022
$FOX opened just above prior day’s close. Nice trend entry on intraday chart. Same with $EQNR. Upside bias, only looking entry for longs based on rising trend, higher open, higher intraday low, and positive earnings release.$CVS and $ARCC left alone.https://t.co/MTEa5b0chs pic.twitter.com/Xjw8sVf1pP— Cory Mitchell, CMT (@corymitc) February 9, 2022
Here are the intraday charts, enlarged. Note that the price rose initially, pulled back, and then started moving higher again. That’s the entry (blue up arrows). The red line on FOX is an example of where the stop loss goes.
Need a reliable process for day trading stocks? I lay it out in the Price Action Stock Day Trading Course.
It guides you through day trading, and teaches one strategy at a time. Practice the first strategy and start making money. Trades a core basket of stocks daily, or trade earnings stocks like discussed in this article.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage. This article contains affiliate links and TradeThatSwing may be compensated if readers sign up for the mentioned service.