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.
Here are some of the earnings announcements till the end of September, in stocks that trade over 2 million shares per day.
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.
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. But I had always avoided it because it was very time-intensive to continually track:
- 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
Basically, it was more work than I wanted to put in, even though the return potential was attractive. But now….someone is doing all that work us…
Finding “Earnings Drift” Stocks
INO has started a service called Drift Trader. Basically, it gives you a handful of stocks that are jumping up on better-than-expected earnings announcements (when applicable). 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.
These stocks have a good chance of continuing to move higher (the drift). But I don’t take their word for it. 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 the use of a trailing stop loss, or alternatively get out when the momentum fades (Drift Trader also provides its own entry and exit signals).
They basically do all the leg work that I never wanted to do. They show me each day which stocks beat earnings and are seeing a price pop. Then I can decide if I want to jump in.
I will be using my own strategy and using the lists they provide as basically my scanner for the strategy. I would encourage others to come up with their own strategy for trading these as well. Although, Drift Trader also has a green, yellow, red system. Green is good, but as things turn from yellow to red it is time to get out because momentum has faded. Here’s an example of the list from September 21, 2022.
It is a good way to potentially make returns when market conditions are flat, or to potentially increase returns when conditions are favorable (because it provides more opportunities to put capital to work).
You can check out Drift Trader, and take it for a free test drive here.
No obligation. Nothing to cancel. Pretty cool simple service. And the full paid version is super cheap each month if you decide to upgrade to get the full lists.
If you join up and want to discuss trades with others, share comments below the article.
You can also track companies and spot when they are having earnings themselves. If they move well following the earnings, you may have an opportunity to take advantage of the drift.
You can also use Finviz to scan for stocks that have had recent earnings.
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 have started to move or are setting up how you like. But you still have to manually check how the earnings performed compared to expectations, last year’s earnings, etc.
Here is a very basic scan I set up:
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.
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
- 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 (see ideas above).
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.
Trading Earnings Drift Stocks
Here are some ideas on how to create your own entry and exit signals for earnings drift stocks.
There are potentially many entry points for earnings plays. Here are some ideas:
- Buy right after the strong earnings, once the price starts moving up. This one can be a little tricky, especially if it gaps and there is lots of volatility. Where do you put the stop loss? You could drop to a lower time frame and wait for a pullback and turn higher (or consolidation breakout). It’s a little easier (for me anyway) if the price opens below the high of the prior candle, and then crosses above it. Then I have a clear entry when price moves above the prior candle high, and I can put the stop loss below the current candle or the prior day’s candle. Only enter if the stop loss is a reasonable size, such as 5% or less in most cases (distance between SL and entry price).
Here’s another idea, which involves waiting for a trigger candle.
- A strong earnings announcement (Drift Trader flags many of these).
- The price can pop or not go anywhere, I don’t really care what it does over the first few days after the announcement. Although, if the price does pop right away, it is usually easier to notice these trades since the stock will show up on “top-mover” lists or attract more attention.
- I want a pullback (may only be one candle) and then an inside candle or even a lower candle. We will call this the trigger candle. Then the price moves above the high of the inside or lower candle to trigger an entry. 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.
- Consider trailing a stop loss below candle lows as they form. 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 the pop higher within about 5 days after earnings. If it doesn’t happen by then, the announcement was likely a dud, even though it may look good on the surface (people don’t care).
- 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 their earnings announcement.
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 vs +20)…but if you keep the stop loss, you still make money (2x -5 vs +20).
STEP, discussed at the top of the article, could also be traded with the strategy idea mentioned above. Although depending on the entry, a stop out may have occurred requiring a re-entry.
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. The second trade snagged a very quick 9% (1.8:1). This is using the aggressive 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.
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 Stock Market Health Update 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.
- Profit targets, I leave up to you.
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.
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.