There are a lot of theories out there on this. Everyone probably has their own rule they follow. Here is an article that does some explaining.
TIPS FOR FISHING EFFECTIVELY WITH BOTH LIVE BAIT AND LURES
Some fishermen swear by live bait, while others will use nothing but artificials. Which type of offering is most effective? The answer is not so clear-cut. Although it's hard to beat the "real thing" when it comes to enticing predatory game fish, lures will often out-produce live bait in certain situations. The fact is, your success with live bait or lures will depend upon the specific conditions, the type and size of fish being targeted, proper technique and presentation, and other factors. While die-hard lure fishermen often look down upon those who use live bait, a complete angler should be able to present both offerings effectively.
Live Bait Fishing Tips
Take the extra time to select the liveliest bait in the tank. Action attracts fish, and a lethargic or lifeless bait will simply not get the job done. Choose a bait that is in good shape and has plenty of "wiggle." This kind of temptation is more likely to trigger an aggressive strike from a hungry game fish. It's also important to change your bait often. If there's no action within a few minutes, crank in your tired bait and replace it with a fresh one.
Use bait that is similar in type and size to the indigenous baitfish species in the area you're fishing. For a bait to be effective, it should appear natural to the predator and closely resemble its current food source. If the game fish are chasing schools of tiny baitfish in the area, fill your tank with micro-sized baits (if available). On the other hand, if larger prey is the catch of the day for area predators, be sure to head out with some “big boys'" in your livewell. In most cases, you'll find that the old “match the hatch'" philosophy rings true.
Make sure the line and hook you are using are appropriate for the bait. Use a small hook for small baits and a larger hook for bigger baits. A good general rule is to use a size a 1/0 hook for 10-pound test, a 2/0 hook for twenty pound test, a 3/0 hook for 30 pound test and so on. Don't try to pin a big sardine on a tiny size-2 hook, and expect to boat many fish. Likewise, using a hook that is too large will often tip off the game fish and deter strikes. When it comes to line, using heavy monofilament when fishing with smaller baits will hinder both the natural swimming motion of the bait and your casting performance. It's fine to use heavier test when using bigger baits, but you'll do better if you lighten up when presenting smaller offerings.
Put your bait in the “strike zone." It's imperative to get your live bait to where the fish are holding in the water column. When the fish are feeding near the surface, fly-lining a live bait with little or no weight is your best bet. If the fish are relating to deep structure, you'll want to use a heavier sinker to get your bait down quickly to where the predators are located. A good sounder is essential for identifying the position of both bait schools and game fish, whether they are near the surface, suspended or close to the bottom.
Lure Fishing Tips
When using a lure, as when fishing with live bait, it's important to consider the general conditions, as well as the type and size of the fish you'll be targeting. Consider the color, pattern and size of the natural live bait source in the area. Also determine how deep the fish are running, and select your lure accordingly. You'll want to use a lighter artificial or a topwater lure for a surface retrieve when predators are feeding in the upper portion of the water column. If the game fish are deeper, you'll do better working a heavier jig or deep-diving plug to maximize the amount of time your artificial remains at those productive depths.
Some anglers believe that color and pattern are of primary importance when selecting a lure for a specific angling situation. Others feel that it's the action of the artificial that matters most. Actually, both factors are extremely important. Various types of lures move differently on the sink and upon retrieve. For example, heavier saltwater jigs designed for "yo-yoing" are made to be fished vertically, and therefore feature less “side to side'" action than surface jigs. The size, weight and composition of a particular lure have much to do with the type of action it delivers. Additionally, the manner and speed in which an artificial is retrieved, profoundly effect that lure's “swimming" action.
Be prepared for strikes as a lure drops, as well as during the retrieve. Often the fluttering motion produced as an artificial descends slowly to the bottom will entice an aggressive strike from predatory game fish. Other times, it seems that fish prefer to pounce on a lure as it's cranked back either rapidly or slowly. When it comes to retrieve speed and technique, it's important to consider the species you are targeting. Fast-swimming game fish typically like a speedy retrieve. Other species, such as bottom fish, prefer a slower presentation. Water temperature can also be a factor when it comes to retrieve speed. Generally speaking, fish are less active when the water is colder. Conversely, game fish tend to cover more water and pursue baits more aggressively when the water heats up. In most cases, you'll attract more strikes by working your lure slowly in colder water, and employing a rapid retrieve in warm water conditions.
If the methods you are employing aren't producing results, don't be afraid to mix things up. When working your lure slowly isn't doing the trick, try picking up the pace a little bit. If a straight retrieve isn't turning on the fish, go with a stop-and-go approach. At times when the fish seem finicky, enhancing your artificial offering by adding a strip bait to the hook will often trigger strikes. Also keep in mind that fish tend to prefer different types of lures during different seasons and at varying times throughout the day. Knowing this, be sure to experiment with a variety of lures, especially if the one you're currently using isn't productive.
When you set the hook, make sure that fish gets the point. Whether you are using lures or live bait, your hooks should be extremely sharp. Using an artificial with dull, bent or rusted hooks will definitely cost you fish. If your hooks aren't in good condition, you may get a lot of bites, but you won't end up with much to show for it at the end of the day. To help increase your catch ratio, use a good hook sharpener prior to each outing.