All buy and/or sell decisions should be based on a pre-established system of clearly defined rules. To be a successful investor or trader, you cannot be making buy or sell decisions on the fly. All psychological research and applied finance studies demonstrates that making such decisions from scratch in the heat of the moment will lead to failure. For example, in his book, Thinking, Fast and Slow, Nobel Prize-winning psychologist Daniel Kahneman demonstrates how people make terrible life decisions by relying on their "fast thinking" mental processes under circumstances when they should be making decisions with their "slow thinking" mental processes. Nowhere is this fundamental insight more applicable than in investing and trading. As investors and traders, our "fast thinking" mental processes are constantly being swayed one way and the other by fast changing market news and the roller-coaster of emotions that are triggered by swings in our actual or potential financial wealth.
But as investors and traders, our success will be determined by our ability to stay cool under pressure and make decisions according to time-tested sound principles. The problem is that it is simply not physically or psychologically practical to perform a brand-new thorough and rational analysis every time there is a change in circumstances. And changing prices are just one of the thousands of variables that change the objective circumstances by the minute. This is why we must follow pre-established rules for buying and selling that we follow religiously regardless of what our emotions are swaying us to do at that particular moment. Therefore, in many ways, a sound investment decision to buy or sell is made before we are actually in the heat of the situation that requires us to execute the choice. Our task in the heat of the moment is simply to execute a rational decision that has already been made ahead of time based on sound criteria.