4 Ways to Avoid Being Influenced by ‘Recent Bias’

The term “recent bias” is thrown around a lot in the trading scene, but what exactly is it?

At its most basic, recency bias refers to the tendency of traders to look only at the most recent set of events, ignoring older but equally important (or sometimes even more important) information.

Recency bias negatively affects how a trader analyzes the market because it clouds their judgment and impairs their decision-making skills.

In forex, the most common manifestation of recency bias is when a trader considers only the most recent trading decisions and loses sight of the bigger picture.

An example of this is a fundamental trader who makes too much sense of an economic event that just happened and doesn’t consider the broader macroeconomic context.

Another example is a technical trader who puts a lot of weight on newly formed candles, causing him to lose track of long-term trends.

There is also a psychological aspect. Let’s say there are two traders.

Mike has won his last 3 trades and has an overall record of 4 wins and 6 losses. Mike’s account is up 1% year to date.

Meanwhile, John is on a 3 game losing streak. John’s record is 8 wins and 7 losses and his account balance has increased by 5% year to date. Mike is high-fiving himself over his winning streak while John is trashed.

But if you look at the big picture, you’ll see that John is actually ahead. He has more wins than losses and even his winning percentage is much higher than Mike’s.

If Mike and John choose to dwell on their more recent trades, they may succumb to recency bias that could adversely affect their future trading decisions.

Mike might end up ignoring possible warning signs and rush into a trade, while John might get frustrated, abandon his risk management rules, and start overtrading. Both situations are clearly undesirable.

Do you often find yourself in any of these (or similar) situations?

If you do, here are some tips to help you avoid succumbing to recency bias:

1. Keep a detailed journal of foreign exchange transactions

As we discussed in School of Pipsology, keeping a detailed trading journal is almost as good as having a coach watching over your shoulder and keeping track of your forex trading decisions.

By monitoring your progress along with the right and wrong moves you’ve made, you’ll be able to get an overview of your overall forex trading performance and avoid zoning out on just your recent trades.

2. Write down your trading plan and make sure you stick to it.

If it helps, you can come up with a checklist of all the criteria that should be met before entering into a trade.

That way, you’d be less likely to give in to your emotions – whether it’s overconfidence from your winnings or increased hesitation after a trading downturn – and you’d be more focused on executing your trading plan.

3. Engage in deliberate practice.

Remember that deliberate practice can remind you why you created your trading plan in the first place and why it works.

Deliberate practice can also help you stay in sync with dominant market themes and allow you to make adjustments to your trading plan if necessary.

By doing so, you will be able to consider the big picture and evaluate your trading performance at the same time. Now that’s hitting two birds with one stone!

4. Monitor your emotions.

Evaluating your emotions is one of the best ways to avoid recency bias.

If you feel like you might be giving in to your emotions, take a step back and try to make a more objective assessment of past trades.

If you think your losing streak is causing you distress, you may need to take a day off from trading or a quick vacation. Some listen to classical music for several hours, while others engage in self-dialogue or talk loudly while trading. The important thing is to figure out what works best for you.