Recency Bias: Why Does It Hinder Your Trading?
|In this post l explain the single psychological trait that causes almost every human to think the same way. I also explain how this can affect your Forex trading health. I'm referring to Recency Bias.
Recency Bias is the process of being influenced in thought and then action by the most recent events that have occurred. This is not simply a trading phenomenon but one that is present in every aspect of life.
Recency Bias in Forex Trading
In trading, Recency Bias means that the most recent trades will cloud your view of the entire trading strategy or system. A few losses can cause you to feel that the system is not working. When this happens you may think you need a new one.
This can occur despite the fact that you probably have little or no actual evidence of this being the case. In fact, your strategy is most likely going through simple draw down. The net effect of this is that any trading strategy you have will last only until it results in a losing position.
You may change to a different strategy when the overall losing position is generated. You may stop taking trades altogether and start increasing your leverage to quickly make back the initial losses. This can result in losing more money from your account. It can even mean your account blowing up completely.
Recency Bias is pretty much linked to all common trading mistakes that you freely read about!
Instead of trying to find ways to overcome all of the different individual errors that traders make, surely it would be better to stop the consequences of Recency Bias in the first place!
So how exactly can do you negate the impact of Recency Bias and cut out almost every mistake that traders are prone to making?
The answer is through the simple act of recording your trading data and then regularly analyzing the results. This serves the primary goal of reducing the impact of Recency Bias. Because it allows you to actually see, at a glance, how your strategy is performing overall.
If you are going through a draw down or a series of losses, you will almost instantly know whether this something to be concerned about. Remember that something only needs changing when the overall performance shows concern beyond doubt. This is when you should take action.
Having this information at hand will improve your mindset. And it will almost immediately eliminate or reduce the amount of mistakes that you make when under the influence of Recency Bias.
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