1) Letting Political Preferences Color Investment and Trading Views: Barry Ritholtz makes an excellent point in his recent article. You may love the new President; you may dislike him; you may have doubts and concerns about his administration; you may have hopes and aspirations for his term in office. Politics is a poor predictor of market performance, as Barry illustrates.
2) Becoming Fixed in a Bullish or Bearish Stance: There are reasons to take a directional view at various times, but chronically taking one stance or another is a sign of imposing one's views on markets, rather than following the flows of supply and demand. I've worked in places where analogies to such market crashes as 1987 and 2008 are regularly trotted out and used to justify bearish stances. Invariably, those have been after times of weakness, preceding market rises.
3) Becoming Locked Onto a Single Time Frame: Traders often have favorite indicators or statistics. They latch onto those and view markets solely through those prisms. What looks like an overbought market in one time frame may be the start of a rise in a longer one. What appears to be a range bound market at one time period might be a pause in a longer-term trend. As in much of life, we are most likely to overreact to events when we fail to place them in context.
These three warning signs are problematic, because they suggest that the trader is not truly evidence-based. An evidence-based trader approaches markets the way a juror ideally approaches a trial: with an open mind, weighing each piece of evidence, and arriving at a judgment based upon the evidence. The competent juror looks for facts and only makes their mind up when the facts line up. It's not a bad model for traders.
Further Perspective: My Masters in Business Interview With Barry Ritholtz
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