Trading, I have heard it said, is nothing more than gambling. Obviously, there is an element of risk and speculation involved but is there not a risk involved when we sit behind the wheel of our car, go boating, or climb a mountain? There is. But do we not do these things because of the risk? We prepare to meet the risk and we accept it. As a trader we meet the risk by preparing for it. If we do not prepare for it, then we are gambling. We are the mountain climber without a rope; on a boat ride without a life preserver; behind the wheel without a seatbelt.
In his new book entitled Trading Without Gambling, veteran trader Marcel Link puts it this way:
Many people look at trading as a gamble, and yes there is risk involved, but a well-prepared trader, with a solid game plan and discipline can learn to trade without gambling, the same way the professional gamblers do (1).
Part of preparing is choosing not to trade through an earnings report. The reason? This type of known news event could wreck havoc on a trader’s account. Sure you could get lucky and make a lot of money on the huge move if the move is up and you have calls or are long the stock. But what if you are short or have puts? Is it worth the gamble? You know the market could care less about your position. In fact, the market can be as cold as ice, especially when earnings are involved.
Today provides a perfect example of what I am talking about. RIMM reported earnings after the close yesterday. Does not matter what the report says, what matters is the reaction at the open today. Let’s take a look:
I always draw an earnings date line with an “A” or “B” for “after”or “before”. I do this for each stock that is setting up in my CROSSHAIRS. It is part of my INTELLIGENCE REPORT. Notice the huge moves for RIMM over the last three earnings reports. The gap up in April and the gap down today are particularly revealing. One day of trading can fill up weeks to months of gains, whether you have been short or long the stock. Why gamble? Why take the chance? I may have been born at night and I may be stupid but I wasn’t born last night and I am not a gambler.
Why not trade in anticipation of the event and then sell the reality? In other words, trade ahead of earnings not through earnings. It is only one day. You have plenty of other days to trade and plenty of opportunities going forward. So wait. Why take a chance on losing all your hard earned money for the chance at being right on an earnings trade?
The best traders do not trade to be right; the best traders trade to make money..and they do not gamble.
