For day traders, one of the biggest perils is falling prey to the gambler's fallacy. This is easy to understand and, at the same time, easy to fall for. In the most basic terms, the gambler's fallacy involves situations where you believe that, because something is going wrong, it eventually has to correct itself and go right. Nothing about the universe makes this true. It is entirely possible that your losses on a particular position can continue and worsen over time without ever correcting in any sense of the word. You have to know when to get out.
Close to even
Ideally, one of your day trading strategies should be getting out of a losing proposition as close to the break-even point as possible. If one of your investments has gone up considerably in value over the last couple of days and starts to go down precipitously, getting out close to the break-even point is generally what most advisors would tell you to do. You can gamble on the idea that, because it was valuable before, it must be valuable again, but you'll find yourself on the bad end of a losing proposition in most of those cases.
Online trading software can be set up so that it accommodates your investment strategy automatically. For example, if getting out near the breakeven point is your strategy, you can set it up so that it would automatically get rid of your position in a particular financial instrument as soon as it hits that point. Whether or not you want to use software like this is up to you. The best trading software, however, includes these types of features, which is telling.
Developing a smart day trading system?
There are day traders out there who take in so much information in a day that they, counterintuitively, really don't know what's going on. You can get contradictory information about any financial product quite easily by simply searching for it. Check one site and to find out it's the best investment ever and check another site and they'll tell you to run screaming from it rather than spend a penny on it. In some cases, you're just going to have to make your own decisions about these matters. You can turn to experts to learn about day trading systems that work, however.
What makes an expert?
Where day trading is concerned, experts generally have a strong background in investment all around. They may have moved over to day trading later in life or they may have started out there, if they're young enough. What's important about them is that they give advice that's based on evidence, not advice that's based on their authority. For example, if you're talking to an expert or reading materials from an expert that's giving you a day trading strategy that's based on the fact that they were a successful investor, you may want to take it with a grain of salt. If they're giving you a day trading strategy that's based on numbers, patterns and solid financial information, then it's probably worth listening to.
If you're going to be an investor and you're going to use day trading as your main means of investing, you need to know when to get out of a bad investment. If you feel like you're gambling on something and you're just holding out because you "just know" that it's going to improve, welcome to what it feels like to fall prey to the gambler's fallacy. If you're not sure, imagine you are sitting in front of a slot machine that hasn't paid off in an hour and consider whether or not you're throwing quarters into it because you "just know" it has to pay off eventually. It doesn't. It's important to remember this if you want to make day trading a productive endeavor.
Adam Halperm offers tips and advice to help you learn day trading strategies.
Source: http://moneycation.blogspot.com/2012/09/guest-post-breaking-even-and-getting-out.html
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