Trading is an attractive option for many entrepreneurs because of the freedom it can offer. The problem is that some people attracted by this sense of freedom do not want to be harnessed by rules.

However, one will quickly discover that most successful traders follow a specific set of rules. This is what rules-based trading is all about, and if you dig deep, you’ll find it’s key to making money in the markets.

Do Your Homework

As Matt Choi who leads trading education company, Certus Trading, explains, rules-based trading forms a cornerstone for successful trading for traders of all experience levels and expertise. Fundamentally, rules-based trading is centred around doing your market research and understanding – and having trust in – the larger patterns of the markets one trades in.

Noting more specifically seasonal patterns in markets, Matt Choi comments,  “[Rules-based is] a way to piggy-back off the seasonal buying and selling that marks the activities of the institutional investment community, and reflects both bullish and bearish environments.”

The key to rules-based trading, particularly in the area of swing trading, is to “set and forget,” says Choi. That means placing a trade and not doing anything until the trade is stopped out, the target is reached or you hit a stop loss. “You’re set as long as you stay within precisely defined windows,” he stresses.

Rules-based trading is well-known among traders for generating consistent results.

Follow the Rules

Keep in mind that when you trade without a well-defined set of rules, you are trading randomly or, worse yet, through emotion, which makes it easy to avoid taking responsibility for the outcome. However, if a trade is planned and executed within a defined set of rules, it becomes much more difficult to blame external factors.

You are forced to accept responsibility if your rules didn’t work or if you deviate from them. You also gain valuable feedback about what’s working and what isn’t. Over time, this enables you to hone and tweak your trading, which gives you a valuable edge. This edge repeated over and over is what leads to consistent winning trades.

Steps to Success

Developing a rules-based trading system involves a number of steps, including observation, where you may notice recurring patterns or relationships in the market. You may notice such patterns yourself or read about recurring patterns on various websites or in academic research, such as white papers. Trading systems begin as a hypothesis based on patterns.

Next comes data gathering, using free or subscription-based software; filters, to exclude certain stocks; and signals, a trigger to buy or sell a security.


Backtesting is critical, allowing you to see how well your system performs. It involves looking at things like annual return and volatility, as well as comparing the results to a benchmark index, depending on what you’re trading.

You may have to adjust some of the parameters to improve your process. In fact, many systems simply won’t perform as you’d hoped, and you may have to start all over again. It’s the nature of the beast.

If, after backtesting, your results are promising, you can test your system using live data. This is another process of trial and error and it may take numerous attempts before you develop a system that works for you.

Rules-based trading may sound restrictive, at first consideration. But it actually helps you become a better trader. Having rules in place leads to responsibility for your actions, reliance on a pre-set program and, if you take the time to do it right, improved results.