Avoiding Trades Before Earnings – Alvarez Quant Trading 24.04.

2019, 18*32

Avoiding Trades Before Earnings

April 24, 2019

Over my last 16 years of research, one of the most asked questions is

should you not take trades before an earnings release. I could never
answer this question because I did not have the data. I can easily recall
trades were a stock came out with poor earnings and crashed 25%. But
without testing this, I would still take stocks into earnings. Because that is
how the testing was done.

A few months ago, I discovered that Quantopian has data for the
earnings dates for stocks. I had been looking for a good reason to try out
Quantopian and this looked like a good project.

A large dose of salt

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Avoiding Trades Before Earnings – Alvarez Quant Trading 24.04.2019, 18*32

Before I get into the details of the test, I must clarify one thing. I am not
an expert Python programmer, which is the programming language you
use in Quantopian. I have only been coding and using Quantopian for a
few months. I did as many checks as I could on my code. But there is a
larger than normal chance that there is a bug in my code. So as always
verify these results yourself before using them for trading. You have been
warned.

For you Quantopian experts out there. If I say anything wrong or could
have done something better, please correct in me the comments below.

​Free PDF: Mean Reversion Strategy

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and get instant access to the rules to a mean reversion strategy with
results from 2003.

The Earnings Data

Quantopian provides free data from 2007 to 2013 on the earnings release
date of stocks. I figured this gives a larger enough test timeframe to see
if avoiding earnings was a good or bad thing.

Quantopian Information
Quantopian works very differently in some respects to how AmiBroker
does. Because of this, some rules and stats will differ greatly from what
you have normally seen in previous posts. Here are some differences.

Quantopian does not have S&P500 constituent data. They have data that
they call the Q500US which is the 500 most liquid stocks. To read more
go to The Q500US and Q1500US.

Entry and exit are done on a particular one-minute bar, starting with the

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Avoiding Trades Before Earnings – Alvarez Quant Trading 24.04.2019, 18*32

9Z32am bar. That is what I will using.

Running a backtest is slow compared to AmiBroker. One test takes about

30 minutes vs. about 20 seconds in AmiBroker. Because of this, I was
limited on the ideas I could test.

The Base Test

Since most questions about earnings have come from mean reversion
traders, that is what I will be testing.

Dates: 1/1/2007 to 12/31/2013

Buy Rules
Stock is member of the Quantopian 500.
The 2 period RSI crosses under (1, 3, 8)
The close is above the 200-day moving average
Rank signals using 100-day Historical Volatility from high to low
Entry is on the next day on the 9Z32 bar

Sell Rules
The 2 period RSI is over 80
If in position above 15 days, exit.
Exit is on the next day on the 9Z32 bar

Base Results
I am not trying to create a great strategy but to have something to
compare against.

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The results are nothing to write home about.

Avoiding Earnings
Since a typical mean reversion trade is about 7-8 days. Here are the
additional rules

Buy Rule Addition

Next earnings date is over 7 days away

Sell Rule Addition

If earnings are in two days, get out on the next day. We exit the day
before earnings.

Results Avoiding Earnings

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More Data

I have said this before but I just love results when they surprise me. I was
expecting slightly worse CAR with a slightly better drawdown. In two of
three cases the CAR came down dramatically while in all cases the
drawdown and Sharpe Ratios got worse.

Spreadsheet
No spreadsheet with this post. Mostly because Quantopian does not
make it easy to get data out.

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Avoiding Trades Before Earnings – Alvarez Quant Trading 24.04.2019, 18*32

Final Thoughts
Given these results, I will continue to trade my mean reversion strategies
through earnings releases. This is why I test. My guess on what the
results will be are often wrong.

One possible future test is also to avoid stocks shortly after earnings on
the theory that stocks selling off after poor results will continue to sell off.

My next post will be a mini-review of Quantopian. Short preview: I will still

be using AmiBroker for my backtesting.

Backtesting platform used: Quantopian

Good quant trading,

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