Beware of this trading disease - Recency Bias

Some traders may be unfamiliar with this one particular disease called Recency Bias. Recency Bias is one of the dangerous trading diseases besides FOMO trading that most traders always avoid.

Even if they are aware, they don’t even realize that they have been infected until something bad happened. So what is Recency Bias? What are the symptoms? And how to avoid it?

The Recency Bias

Recency Bias is a dangerous psychological disease in trading. This disease is characterized by emotion in trading which can affect the market analysis. Generally, a trader who suffers from this disease will have a polluted mindset due to his last position, thus forgetting the plans that have been drawn up.

In a book entitled Your Money Your Brain Jason Zweig explains that recency bias is a basic human trait that does not estimate possibilities based on long-term experience, but only uses assumptions based on short-term experience. Which could spoil your trading mindset for long-term trading. And the recent trading positions would greatly influence your mindset and future trades.

Therefore, whatever the result of the last trade, you should not be influenced and take it as a reference. It may look easy, but in fact, many traders are infected with this disease without even knowing it.

Recency Bias of Winning Streak

Recency bias can occur because of consecutive wins experienced in trading. Generally, a trader will be more confident when they achieve successive wins. High self-confidence can cause traders to add many positions and widen the ranges without a proper calculation.

This condition might decrease the profit or even turn into a loss. Positions that initially always win in a row might spoil the trading plan if the trader catches this kind of disease.

Therefore, it is very important to control your emotions when you have a winning streak. Stay on track with your trading plan and avoid greedy behavior. That way, you can keep the benefits that have been obtained.

Recency Bias of Losing Streak

Recency bias can also occur because of consecutive loss experiences in trading. If a trader is on a losing streak, his emotions of fear may interfere with the trading plan that has been drawn up.

Traders will tend not to look at opportunities objectively, but to be alert and restrained. If you can’t control these emotions, you will only experience continuous loss and eventually depression.

Therefore, you should also know the risks before trading. Excessive fear will also make you fall into the abyss of loss. If you are on a losing streak, stay optimistic and evaluate your trading strategy to find out where it went wrong.

How to Avoid Recency Bias

To avoid this trading disease, you will need a strong commitment to stay focused and avoid all kinds of things that characterize this trading disease.

There are 2 simple keys to avoiding this disease :

Don’t brag and hope for a trading plan that has been made just because you have a winning streak.
Don’t be afraid and frustrated if you have a losing streak. Come back to thinking objectively. Re-evaluate your trading strategy to find errors.

That’s it. Pretty easy right? Well, it might sound easy but you will need to keep focus and practice every day. It’s a train for your mind. How to keep firm with your plan despite the conditions.

Well, that’s the explanation of one of the trade diseases called Recency Bias that might help you avoid this disease. If you find this helpful then don’t keep this information to yourself. Share this information with your trading friends so they might be aware too of this disease.