Its been a while since I did an article on here about what NOT to do when trading. My whole trading strategy is based on not losing money rather than having the focus on making money. Although this sounds like a simple distinction, many traders do not focus on minimizing losses. It is much more exciting and sexy to focus on the big potential wins.
However, most professionals know that your trading strategy should be primarily about focusing on the potential down side and how to mitigate that risk (for example this guy is one of the best traders I know and he abides by this way of thinking).
Such a situation came up last week when I was trading Alaska Airlines ($ALK) (article HERE). I made a decent profit trading this stock but I followed my own rules and sold before earnings. That is one of my solid rules – NEVER EVER EVER EVER HOLD A STOCK THROUGH EARNINGS. Many people asked me why not hold through earnings? After all that was my thesis for the stock increasing in price in its run up to earnings – that they would report stellar earnings! And they did report great earnings and the stock continued upwards in price without me owning a position. It went up about $4-$5 dollars per share after earnings from my sell point. I probably could have doubled or tripled my profit from $ALK if I had held through earnings.
The problem is that earnings are hugely risky because you never know what will happen. ANYTHING can and does happen. Stocks can report stellar earnings then tank. Even a single accidental comment by a CEO or CFO can cause mass panic after the earnings call. There is just too many unknowns to make holding through an earnings report worth the risk.
Here is a good example of what can happen. I also bought a position last week in Hawaiian Airlines, $HA. My thesis was similar to that of my $ALK trade where airlines are price gouging on the decrease in oil price and likely to report great earnings. Here is the daily chart for $HA
So you can see from the chart that people were buying in causing the price to increase prior to earnings on the 30th January. I bought in at $24 per share and rode the trend up to $26.5 a day or two before earnings. Then i sold the position for a 10% gain. Had I held through earnings I would have lost 30%. I don’t even know what the company announced or why the earnings failed to impress the way $ALK earnings did. And for me it does not matter because I made my profit and got out to avoid what is in my opinion an unknown and unacceptable risk.
I hope this helps new traders! If you want to know more about how I learned to trade and where my trading rules come from, check out this guy.