There are lots of different ways or mechanisms for making trading decisions, but as I’ve alluded to in many different videos and responses to questions, having a set of rules that tells you when to get in and when to get out is the best way for retail traders to be consistent because our emotions get in the way. We have things going on in life like businesses, stresses, positive and negative emotions, and all of that will come into our trading decisions if we’re not careful. However, we can get rid of it and sweep it all aside by having rules that tell us when to get in and when to get out. The trick is those rules have to be profitable. You’ve got to take those rules and test them over different market history and evaluate whether they’re profitable over a long period.
A big mistake many traders make is having a set of rules or an indicator or a trade advisory service and saying, “Oh, look, over the last three months, this has made X percent return, which is an excellent approach so I’m just going to follow this approach.” But three months in market time is microscopic, and it’s very small, so when you think about, “Are my rules profitable? Will I build my wealth? Will I make money with these rules?” You want to think over decades, not over months, because there are bull markets, sideways markets, bear markets, quiet markets, volatile markets, pandemics, declining interest rates, and rising interest rates. There are all of these things happening in the world, and we need to make sure that whatever rules, whatever approach we are following, will keep our account alive and growing throughout all of that. It can also keep it safe and in cash when it’s out of sync with the market and get us back in when it’s in sync with the market.
Therefore, the best way to decide when to enter and when to exit is to have a set of a backtest or set of trading rules, a trading system if you like that tells you when to do that and apply those rules consistently day after day to make your trading decisions. It takes a lot of the brain to work out of it; it certainly shrinks the time. I started trading by looking at charts, looking at indicators, drawing trend lines, doing analysis, and reading broker reports, all these things 20 odd years ago.
To find one or two trades to make the next day, I spent hours every night doing analysis. However, when you approach the market systematically, those hours shrink to minutes because all you need to do is update your data for the previous day and run your scan to see what your buyers and sells are for the next day, place the orders with your broker, and close the computer. It’s a fast, simpler way to trade because all of the work and thinking is done upfront in the design and testing of the rules. The day-to-day implementation is dead easy, which makes it the best way to decide how to enter and exit the trade.