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.
The price drifting/heading higher occurs after the announcement. 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
I have a friend over at Ino, and they started a service called Drift Trader. I subscribed to the free trial, and even that is providing loads of trade ideas. Basically, each day it gives you a handful of stocks that are jumping up on better-than-expected earnings announcements (when applicable).
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 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 have been tracking their picks for several weeks.
Some of the names are up 30% or more within a week or two. Many are up about 5%, and only a couple dropped. Overall, the results are promising and quite profitable so far (no way to know if that will continue into the future, but as long as losses are kept small, and winners are bigger, there is potential).
I’m not trading these quite yet. I am still checking it out, monitoring how their daily lists perform, and finalizing my own strategy. The results have been very good, so I will likely start trading these lists fairly soon. I will update this page as time goes on and more results come 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 some examples.
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.
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.