In today’s article we are going to talk about something that most traders would agree upon, but something that is difficult for most traders to do. This has a bit to do with their trading mindset, as well as a lack of confidence in their trading strategy. As the title states, we are going to discuss trading based off of the evidence, not off of what we think or feel might happen. Evidence-based trading is trading on what we actually see happening on the charts, the facts that we see on the computer screen, and then making a decision to trade or not to trade based off of this evidence.

Most traders would agree that they should be doing this, but, like I said, many do not do this. One of the first things we need to do in order to trade the evidence is to have a defined set of rules that we are trading. These rules will give us the criteria we need in order to identify the evidence. If we do not have the rules defined well enough, we won’t know what to look for. If we don’t know what to look for, then we are guessing how to trade. The second thing we need to have is the confidence that what we are trading is going to be profitable; not profitable on every single trade, but profitable over a series of trades. If we have our rules and have gained confidence in those rules, we will have a greater success in trading the evidence.

An example of evidence on a chart would be the common rule of trading with the trend. If our rule stated that we were only going to buy in an uptrend, then we would need to define that rule so we could identify the evidence that the trend is actually up. Our rule might be something as simple as saying, “If the 40 period simple moving average is pointing up and the price is currently above the 40 period simple moving average, then the trend is up.” This is a well-defined rule, one that we could apply to any chart that has the 40 period simple moving average on and see if it is met or not. The evidence would be clear on any chart and on any time frame. Having a rule like this will take out the guesswork as to whether or not the chart is trending up or not.

Evidence-based trading is critical in developing a pattern of successful trading. Traders who have defined their rules so they can see the evidence on the charts will be more confident and more successful in trading.

Take some time to review your current set of rules, make sure they are well-defined so you can use them to find the evidence on the charts. If your rules do not do this, make sure you take the time to rewrite them so you can simply look at the chart and know if your rule has been met. Then you will become the type of trader that can see the chart and have confidence to take the trade.