In order to Avoid Recency Bias in Trading, a Trader needs to understand what exactly the Recency bias is and how it affects your trading. Recency Bias is a psychological phenomenon which can disturb your trading performance. In order to become a consistently profitable trader, you need to focus on your current trades instead of giving too much importance to your past trading performance. Today’s article will help you eliminate one of the most common psychological errors that traders make.
Firstly, to solve any problem, we need to identify the problem, and after identification of the problem, we will try to solve it. Here, the main problem is that traders generally give more importance to their recent trades and get affected by the results of their last trade. For example, if a trader has a winning streak in the past, then there is a high possibility that the trader may be overconfident and commit some mistake due to that overconfidence.
On the other hand, if some have a losing streak in their past, then there is a high possibility that the trader may be under pressure and unable to trade with his full potential. So, let’s solve this problem!
Well, there is no direct answer to this question. Your last trade will indicate a lot about you as a trader. Let’s take an example; if you look back at your last five trades and find that you are losing more in your losing trades as compared to your winning size in your winning trades, then, in that case, your last trades are telling you that maybe you are doing something wrong. So, if you want to change this, you need to change your trading system; otherwise, you will keep getting the same results.
Your last trade matters a lot if you are trading in the wrong way because, at that time, every trade will tell you that you are doing something wrong. Practically, your last trade does not have any relation with your current trade, but when you trade, your last trades will more or less affect your psychology a little bit.
If you are winning more when you win and when you lose less by cutting your losses fast, then your past trades should not affect you much.
Recency Bias is a psychological phenomenon in which humans give more importance to recent events than past ones. This psychological phenomenon is applicable in trading as well.
Traders can have various Recency Biases based on their previous performance.
Case 1- Effect of Recency Bias in a losing streak.
If you had any losing streak in your past, try to recall how you felt during your losing streak. Knowingly or Unknowingly, our last trades affect our current trades.
Generally, when a trader is in a losing streak, he becomes underconfident due to Recency Bias. Due to this, either he will not take trades that fit into his system due to the fear of losing money, or he will overtrade; both of these actions will lead to failure.
Case 2- Effect of Recency Bias in a winning streak.
A trader goes through different cycles; he will face losing streaks, he will face winning steaks, and the cycle continues. When a trader is on a winning streak, the Recency Bias again comes into the picture.
Whenever a trader wins continuously, there is a high possibility that he will be overconfident, and he will take riskier bets out of excitement. I think this is the most significant consequence of Recency Bias in a winning streak.
Now a question arises about avoiding this psychological error, and I think there is no hard and fast rule for this. Avoiding Recency Bias in trading is only possible when you equip yourself with the proper trading knowledge and sufficient experience.
Do you know How Hedge Fund Managers or Institutional Traders Trade?
They all have trading systems running for them. So, in simple words, automated systems make money for them. They try to automate all possible things so that they can remove or nullify human execution errors from their systems.
But As an ordinary Retail Trader, we can’t automate these things. To avoid psychological errors, we need to eliminate emotions. This will not happen in one or two days; as you gain more and more experience in trading, you will know how important it is to keep your emotions aside whenever you trade. When you keep your emotions aside, you will avoid Recency Bias in trading.
I hope that through this article, you get a clear idea about how your Recency Bias affects your psychology in trading and how you can avoid that with proper knowledge and experience. If you have any suggestions regarding this article, please let me know in the comment section, I will be more than happy to hear them!
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