Have you ever felt like the market is intentionally “tricking” you? Like it somehow knows your next move and acts to counter it? If so, you’re not alone—many traders experience this at some point in their careers, and you might even be struggling with it right now.
In this lesson, we’ll explore recency bias, also called the recency effect, and how it can distort your trading decisions, making it feel like the market is out to get you. We’ll also cover strategies to help you avoid this bias and protect your trading account from its harmful effects.
Are You Losing the “Forest” in the “Trees”?
In psychology, the recency effect describes the tendency to recall the last items on a list more easily than the others. In trading, recency bias occurs when you place too much emphasis on your most recent trades, losing sight of the bigger picture. In other words, you can’t see the forest for the trees.
Jason Zweig explains in Your Money and Your Brain:
“It is human tendency to estimate probabilities not on the basis of long-term experience but rather on a handful of the latest outcomes.”
For example, how often have you exited a trade at a 1:2 risk-reward profit, only to watch the market continue in your favor for another 2 or 3 times your risk, without you? Naturally, this can lead you to decide that next time you’ll hold longer. But then, the next trades may not run, reversing instead at the 1:2 level.
This happens because recency bias makes you base your next trade on the outcomes of your most recent trades rather than on logic or your trading strategy. Similarly, you might exit trades early after a few losses, only to see later trades surge past your exit point. Either way, focusing too heavily on recent results can make you feel like the market is playing tricks on you.
How Recency Bias Affects Your Trading
Successful trading requires objective decision-making and discipline. When you let recent trades dictate your next move, you are trading based on emotion, not strategy. This behavior makes it seem like the market is “tricking” you, because it rarely behaves according to your expectations. Even if it does, trading off your recent experiences rather than your plan is a dangerous habit that will ultimately cost you money.
The Hindsight Learning Trap
I like to think of recency bias as a “hindsight learning trap,” because that’s exactly what it is: a trap. You trick yourself into thinking that just because the market behaved a certain way on your last trade, it’s likely to behave the same way again. In reality, this is far from true. The market moves independently of your previous trades and does whatever it wants, whenever it wants.
It’s crucial to remember that trading performance should be evaluated over a large sample of trades, not just your most recent ones. Ideally, review results over six months to a year to gain an accurate understanding of your trading skills and habits. Just as relying too heavily on lower time frame charts can mislead your trading decisions, focusing too narrowly on a small set of recent trades is equally risky.
It’s human nature to give extra weight to recent events, but in trading, this tendency can lead to serious mistakes if you let it influence your decisions.
How to Maintain the Bigger Picture
To avoid falling into recency bias, it’s essential to stay focused on the “forest” rather than the “trees.” Here are some strategies to help:
- Remember that every strategy has a random distribution of winners and losers. Even a strategy with a 55% win rate can’t guarantee that the next trade will succeed. Basing your next trade on recent outcomes is illogical and counterproductive.
- Treat each trade as independent. The market doesn’t follow patterns based on your last trade. Just because your previous trade gained 400 pips doesn’t mean the next one will. In fact, expecting it to can set you up for disappointment.
- Take time off after trades. Whether you win or lose, stepping away from the market for a day or two can help calm your emotions. When you return, review your trading plan and refocus on the bigger picture.
- Keep a trading journal. Recording your long-term performance helps you maintain perspective, making decisions based on facts rather than being swayed by recent results.
- Stick to your trade selection criteria. Use a checklist for your high-quality trade setups. This ensures you follow your trading plan and don’t let recent wins or losses drive your decisions emotionally.
- Be self-aware while trading. Trading is a mental game, and self-awareness is critical. Monitor your mindset and actions continuously, ensuring you act with logic and discipline rather than emotion.
Conclusion
All trading mistakes stem from acting on emotion instead of logic. Recency bias is no different: it occurs when your most recent trades exert too much influence over your next decisions. While it’s relatively easy to identify after the fact, stopping it in real-time is far more challenging.
Overcoming recency bias requires conscious effort, discipline, and a focus on the bigger picture. By following the strategies outlined above—sticking to your trading plan, keeping a journal, and reviewing performance over a significant sample—you can minimize the influence of recent trades and make decisions based on logic and objectivity rather than emotion.
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