The Psychology of Trading Earnings Gap Breakouts

Trading earnings gap breakouts can be a rollercoaster of emotions. This article explores the psychological challenges you'll face and how to develop the mindset of a successful trader.

Entry Rules

• Overcoming the fear of buying a stock that has already made a large move is the first psychological hurdle.

Exit Rules

• The fear of giving back profits can cause you to exit a winning trade too early. The greed of wanting more can cause you to overstay your welcome.

Profit Targets

• Having pre-defined profit targets can help you overcome the emotional decision-making process.

Stop Loss Placement

• Honoring your stop loss is one of the most important and most difficult aspects of trading.

Position Sizing

• Proper position sizing can help you manage the emotional impact of a losing trade.

Risk Management

• A solid risk management plan is your best defense against emotional trading.

Trade Management

• Develop a mechanical approach to trade management to remove emotion from the equation.

Psychology

• FOMO (Fear of Missing Out): Chasing a stock after it has already broken out is a recipe for disaster.
• Confirmation Bias: Only seeking out information that confirms your belief that the trade will be a winner.
• Discipline: The ability to stick to your trading plan, even when it's difficult, is what separates successful traders from the rest.