How Does Recency Bias Impact FX Traders?

Recency bias can drastically affect your profitability, make sure you know how to overcome this challenge
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We have a quick question from a new subscriber asking how they can overcome the fear of taking a trade when they’ve had a few losing trades in a row?

So, this question actually deals with a very common thing called recency bias, this is not only something that troubles traders though, it can by something that changes our perspectives on many professions and can affect us in our personal lives as well.

What recency bias is is actually quite simple, it’s basically when we fixate on things that has happened recently as opposed to the bigger picture.

So, imagine your scenario right now, you’ve had a couple of disappointing trades, let’s say 5 in a row. Even though 5 trades isn’t a lot, the fact that the last 5 has been losers can give you a recency bias that expects the next one to be a loser as well.

Vice versa is also true, imagine you’ve been on a winning streak and have 7 winning trades in a row, what this can do is give you a recency bias that everything is going fantastic and there is just winners all around and then you can take a next trade with lots of confidence with the expectation that it will also be a winner.

The problem with recency bias is that it can keep you out of great trades and get you into really bad ones as well.

If you’ve had a few losing trades in a row, and suddenly you are faces with a really great trading opportunity, you’ve done all your analysis you know this is a good opportunity but suddenly the doubt starts to creep in and you begin second guessing yourself on whether you should enter or not because the recency bias is telling you that this will probably be another losing trade.

Also imagine that you’ve had 10 winning trades in a row and you’re feeling like you’ll never have a losing trade ever again, in this scenario you might jump into a trade because it “feels” right without doing your regular analysis and without doing proper risk management because your recency bias is giving you a false sense of security.

In both cases, recency bias can really affect you negatively. Now, there are plenty of psychological tips and tricks that you can do to try and get yourself out of that mindset, but to be honest, the very best way to beat that is with experience.

Every professional sports person will have a bad day every now and again, but that one off day won’t affect the next match because they’ve probably played hundreds and thousands of matches and had hundred and thousands of practise hours. The repeatability of a process really helps to get rid of recency bias because you tend to think more bigger picture instead of just short-term.

And when you do feel that the recency bias has gotten a hold of you, whether you are feeling like captain doom due to a few losing trades or whether you feel like iron man due to a few winning trades, if you notice those feelings creeping in just step away from the screens. Go outside, take a walk, grab a coffee and just reflect on what is happening and get your head back in the game.

So, hope that helps, if there’s any other questions don’t hesitate to let us know.

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