“Recency bias” is a buzzword that gets tossed around frequently in trading circles, but what does it actually mean?
Put simply, recency bias is the tendency of traders to place excessive emphasis on what just happened while undervaluing longer-term information.
This bias undermines a trader’s market analysis by clouding judgment and compromising decision-making abilities.
In forex markets, recency bias typically shows up when traders fixate on their latest trades and lose perspective on their overall performance.
Consider a fundamental trader who overreacts to a just-released economic report while neglecting the broader macroeconomic context.
Or think about a technical trader who gives excessive weight to recent candlestick patterns, causing them to miss important long-term trends.
The psychological dimension is equally important. Picture two traders:
Mike just closed 3 winning trades and has an overall record of 4 wins, 6 losses. His account is up 1% for the year.
John just experienced 3 consecutive losses. His record shows 8 wins, 7 losses, and his account is up 5% year-to-date.
Mike is celebrating his hot streak while John feels discouraged.
Looking at the full picture reveals that John is actually performing better. He has a superior win rate and significantly higher returns than Mike.
When Mike and John focus too heavily on recent results, they risk falling victim to recency bias, which can sabotage future trading decisions.
Mike might ignore red flags and rush into trades recklessly, while John could abandon his risk management protocols and start overtrading out of frustration. Neither outcome is desirable.
Do you recognize yourself in these scenarios?
If so, here are strategies to combat recency bias:
Keep a Detailed Trading Journal
As emphasized in the School of Pipsology, a detailed trading journal functions like having a personal coach monitoring your every decision.
Tracking your progress alongside successful and failed trades provides a comprehensive view of your trading performance and prevents you from obsessing over recent results.
Document Your Trading Strategy
Create a checklist of conditions that must be met before entering a trade.
This reduces emotional decision-making, whether it’s overconfidence after wins or hesitation after losses. It keeps you focused on execution.
Engage in Deliberate Practice
Deliberate practice reinforces why you developed your trading strategy and validates its effectiveness.
This practice also helps you stay aligned with prevailing market themes and enables you to modify your approach when conditions change.
This dual benefit allows you to maintain perspective while simultaneously evaluating your performance.
Monitor Your Emotions
Emotional awareness is critical.
If you notice frustration or overconfidence creeping in, step away and review your trades objectively.
If a losing streak is stressing you out, take a short break. Some traders reset with music. Others journal or talk through their thought process.
Recency bias is subtle. It feels logical in the moment. But trading is a long game.
Judge your performance over months, not days.
