Rules-Based Trading, Easy As ABC

Question:

I believe that once having got the basics of trading, it is simple enough to trade knowing your parameters. How simple can it become? Thanks.

............ from KSM

Answer:

Hi KSM,

The answer to your question is simple; it can become incredibly simple to trade. I am talking about “rules-based” trading combined with the convenience of trade triggers and conditional orders.

The essence of rules-based trading is to control the decision-making process. Once you know your “rules” (parameters), you design a system that implements your strategy, almost completely removing your decision making from the process.

Emotions, specifically fear and greed get in the way of sound judgment. If you are to have any chance at successful investing, you must find a way to eliminate (or at least control) these two most powerful emotions in the investing world.

Rules based trading strategies are designed to do exactly that. They are decision-making systems. Rather than basing decisions on emotional 'gut feelings', rules based trading systems are based on logical algorithms evolved over a long history of what works and what doesn't. Not just rules for cutting losses short and letting profits run, but also sound rules for initiating positions, adding to positions, and when to exit positions.

Trade triggers and conditional orders allow for an almost “walk-away” trading program. All you have to do is find potential trades (some systems even do this), and then set the program into motion.

When your preset parameters are met, the trade orders are executed, stops are set, and, hopefully, profits are taken. If not profits, then your preset loss is taken when your preset stops are hit.

Many traders rely on rules-based trading, and in my opinion, this is good. One important point to consider, though, is that rules-based systems can be complex, and setting one up requires some work and careful thought. Many trading platforms simplify the mechanical process of rules-based trading, but one thing you can never escape is the work you need to do to find the trade and set it in motion, at least not yet.

Trade in the day; invest in your life...

Regards,

ZL