The term “recency bias” gets thrown around lots within the trading scene, but what exactly is it?

In essentially the most basic sense, recency bias refers back to the tendency of traders to take a look at only the most recent set of events while disregarding older but equally necessary (or sometimes much more necessary) pieces of knowledge.

Recency bias negatively affects the best way a trader analyzes the market, because it clouds his judgment and damages his decision-making skills.

In forex, essentially the most common manifestation of recency bias is when a trader zones in just on his most up-to-date trading decisions and loses sight of the larger picture.

An example of it is a fundamental trader that puts an excessive amount of meaning in an economic event that just happened and fails to take into consideration the larger macroeconomic background.

One other example is a technical trader placing loads of weight on newly formed candles, making him lose track of the long-term trends.

There may be also a psychological aspect to it. 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-trade losing streak. John’s record is 8 wins and seven losses and his account balance is up 5% year-to-date. Mike is high-fiving himself over his winning streak while John is down within the dumps.

But for those who take a look at the larger picture, you’ll see that John is definitely ahead. He has more wins than losses and even his percentage gain is far larger than Mike’s.

If Mike and John decide to dwell on their more moderen trades, they might succumb to recency bias which could adversely affect their future trade decisions.

Mike could find yourself ignoring possible warning signs and enter a trade unexpectedly while John could turn out to be frustrated, abandon his risk management rules, and begin overtrading. Each situations are clearly undesirable.

Do you frequently end up in either one in all these (or similar) situations?

Should you do, listed here are some tricks to assist you avoid succumbing to recency bias:

1. Keep an in depth forex trade journal

As we’ve discussed within the School of Pipsology, keeping an in depth trading journal is sort of nearly as good as having a coach watching over your shoulder and keeping track of your forex trade decisions.

By monitoring your progress together with the best and unsuitable moves you’ve made, you’ll find a way to have a bird’s eye view of your overall foreign currency trading performance and avoid zoning in on only your recent trades.

2. Write down your trade plan and make sure that you keep on with it.

If it helps, you’ll be able to provide you with a checklist of all the factors that must be met before entering a trade.

This manner, you’d be less likely to offer in to your emotions – whether it’s overconfidence out of your winning streak or increased hesitation after a trading slump – and be more focused in executing your trading plan.

3. Engage in deliberate practice.

Do not forget that deliberate practice can remind you why you created your trade plan in the primary place and why it really works.

Deliberate practice can even assist you stay in sync with the dominant market themes and permit you to make adjustments to your trade plan if essential.

By doing so, you’ll find a way to take the larger picture into consideration and assess your trading performance at the identical time. Now that’s hitting two birds with one stone!

4. Monitor your emotions.

Taking stock of your emotions is among the finest ways to keep away from recency bias.

Should you feel that you just are likely to offer in to your emotions, step back and take a look at to make a more objective assessment of your previous trades.

Should you think that your losing streak is causing you distress, you would possibly must take a time off from trading or a fast vacation. Some take heed to classical music for a few hours while others engage in self-dialogue or talking out loud while trading. What’s necessary is that you just determine what works best for you.