Trading the Earnings Pop & Pullback
Strategy Overview
This strategy capitalizes on a common market pattern: a stock surges on good earnings news, then pulls back. This guide breaks down how to identify and trade this opportunity.
"Sell the News"
Anticipation often builds a stock's price before earnings. Once the positive news is public, early buyers take profits, causing a temporary dip.
Profit-Taking
Short-term traders who bought before the announcement sell into the initial strength to lock in their gains, adding to the selling pressure.
Guidance is Key
A company's future outlook (guidance) can be more influential than past results. Weak guidance can easily turn a positive earnings beat into a pullback.
Technical Levels
The pullback often finds support at key technical levels, like VWAP or prior highs, offering potential entry points for savvy traders.
The Interactive Playbook
Follow the step-by-step process of the trade. Click on each step to see the details and an illustrative chart of the price action at that stage.
Advanced Technical Tools: Fibonacci
Fibonacci tools are powerful for identifying potential support, resistance, and price targets. Explore how retracement levels and channels can be applied.
Fibonacci Retracement Levels
Fibonacci retracement levels (23.6%, 38.2%, 50%, 61.8%, 78.6%) are horizontal lines that indicate where support and resistance are likely to occur. They are derived from the Fibonacci sequence and are drawn between two significant price points (a swing high and a swing low). These levels suggest areas where price might pause or reverse before continuing its trend. The 50% and 61.8% levels are particularly watched by traders.
Fibonacci Channels
Fibonacci channels are a series of parallel trendlines that define potential price paths and dynamic support/resistance within a trend. They are constructed by drawing a base trendline connecting two swing points, and then drawing parallel lines at Fibonacci multiples of the distance from a third swing point. These channels help visualize the likely trajectory of a price trend and identify potential turning points within it.
Why Pullbacks Happen
Understanding the psychology and market mechanics behind the pullback is crucial. Click each reason to learn more.
Critical Risk Management
This is a high-volatility strategy. Success depends on disciplined risk management. Never trade more than you can afford to lose.
Use a Strict Stop-Loss
Always define your exit point before you enter a trade. Place a stop-loss order immediately to protect against larger-than-expected losses.
Proper Position Sizing
Due to the high volatility, reduce your normal position size. Risk only a small, predefined percentage of your trading capital on any single trade.
Control Your Emotions
Fast-paced trades can trigger fear and greed. Stick to your pre-defined plan for entries, exits, and risk. Do not let emotions dictate your actions.
