Now you have decided that you are going to trade a particular security and you need to
find a way of entering and exiting the market. So, how do you approach it, do you just
jump in with a gut feeling or do you use some kind of system to help you make the decision.

We will look at a few ways traders decide on the best way to make a decision. First there
is just guessing which way the market is going to go. Now as surprising as it may seem
there are many trader who do just that. They take a look at a chart or some news and
then decide if they should buy or sell. If they make money consistently then it is hard to
argue that this is the wrong way to trade the market. The problem I see with this type of
trading is that it is almost impossible to reproduce results consistently. In other words the
trader that trades by instinct can never really pass on his knowledge, as there is no clear
rules that he applies to the market on a regular basis. I know a few trader who trade like
this but unfortunately I don't know any who have gone the distance and are there year
after year.

Traders who apply a method to their trading inevitably have better results. If you use the
same criteria to each trade then you at least have a reference point from which to work.
If you are losing you can then change specific things in you're decision making process in
order to find the right criteria. By using a method in your trading you are moving towards
the scientific approach and just as a scientist will carefully research and record each
experiment so should the trader trying to perfect the method he is using.

If you apply XYZ as your reason for entering a trade and you can see after a predetermined
amount of trades that it is not working then you can change X, Y or Z until you find
something that does work. Typically the method trader has researched a particular theory
he has by doing back testing (applying the theory to historical charts) and comes up with
indicators, tools or some other method of determining the entry and exit criteria. If at the
end of his research he find that he can make money he will then apply that method to the
market. As he still has to make the decision to enter or exit there is still the human element
to consider. Even though his method tells him he should enter a trade for some
psychological reason he decided not to take the trade. There lies the weakness of the
method trader. Even though he knows he should enter or exit a trade he doesn't because
at that particular moment in time some voice inside him tells him not to do it. The solution
is to make it mechanical as much as possible.

Mechanical trading systems. There has probably been more written about mechanical
trading systems than any other topic in trading. The premise of mechanical systems is that
a particular theory he's been beck tested over a long period of time and has consistently
made money. There is no emotion involved with the decision making process at all. If the
system says buy the security then you buy or an order is automatically done for you. This
takes away all the emotional up's and downs and all you have to do is buy the system and
supply the money. I have been in heated debates with other trades about the value of
mechanical trading systems. Some traders swear by them and others think they are a waste
of time. Which is true only the individual can answer. My own personal experience with
systems after having tried over twenty different ones is that they typically produce
unspectacular results and after a time they tend to blow up and lose money. The other
reason I am not particularly fond of systems is that when you experience large draw down
(your account goes backwards) you tend to lose faith in the system just before it kicks in.