The short answer
Sort by set if you're a completionist, by rarity if you're an active puller, and by type if the binder is for display. Most collectors eventually run two binders: one master-set binder organized by set order, and one 'best of' binder organized by rarity. If you only ever build one binder, pick the system that matches why you're collecting — completion, accumulation, or showing off.
By set — best for completionists
Cards sit in official collector-number order, exactly as the set was printed. It's the most satisfying system if your goal is a complete set, because the binder doubles as a checklist: every gap is a card you still need. The cost is discipline — you have to leave empty pockets (ideally filled with placeholder cards) so the order never breaks. If you love the idea of holding an entire set in sequence, this is the one.
By rarity — best for active pullers
Commons up front, chase cards in back. The huge advantage is maintenance: when you open packs constantly, a rarity binder absorbs new cards without ever forcing a re-sort, and your best pulls naturally collect on the back pages where they're a pleasure to flip through. It's the lowest-effort system for people who value 'everything has a home' over 'everything is in order.'
By type — best for display
Grouping by Fire, Water, Grass, and so on makes the most visually pleasing binder and the most intuitive one for kids, since it mirrors how people naturally think about Pokémon. It's the weakest choice for completion — one set's cards scatter across every type — but the strongest for a binder that's meant to be admired rather than finished.
How to decide in 30 seconds
Ask one question: when you open this binder, what do you most want to see? If the answer is 'how close I am to finishing a set,' sort by set. If it's 'all my cards have a place to go,' sort by rarity. If it's 'my collection looking great,' sort by type. Your honest answer to that question is almost always the right system — don't overthink it.
The two-binder system most people end up with
There's a reason experienced collectors stop trying to make one binder do everything: the goals genuinely conflict. A set binder wants strict order and empty gaps; a display binder wants only your best cards with no gaps at all. Running both — a by-set completion binder and a by-rarity or by-type showcase — lets each one be great at its job. Start with whichever matters more to you and add the second when your collection outgrows the first.
Switching systems without starting over
If you've outgrown your current setup, you don't have to re-sleeve everything in one sitting. Pull cards into temporary stacks by your new categories first, lay out the page order on a table, and only then load the pages. Side-loading pages make this painless because cards slide in and out cleanly. Do it one set or one type at a time over a few evenings rather than trying to rebuild the whole binder at once.