Recency bias is the concept that we as people base our current emotional decisions on our recent decisions depending on how those decisions played out and affected us.
So how can this affect us as traders, if for example you’ve placed and won ten trades in a row as a consequence you will have no have no hesitation placing another position based off of those experiences.
However if you have won a string of trades but recently you have had a run of losses this will affect our mentality, so say you have won 50 out of 60 trades with the most recent trades being losses that will affect our mentality.
This is because we as a species are programmed to focus on the most recent past and this can be a issue for a trader as this can hold us back.
So say we have a very good winning strategy and we know we win overall, if we can’t overcome the inner barrier of of recency bias it will hold us back as traders and basically prevent us from making us consistent profits.
It is for that reason a very important concept to be aware of and as traders the way to overcome it is to keep a track of our trades by using a spreadsheet, online tool or tools within MT4 and they will simply give you the statistics and an overview to see how good you are and thus show you how consistent you are. If you are profitable and are on occasion losing your head this is recency bias in play. As a trader you will definitely have losing trades and when the recency bias takes hold, it can potentially wipe out the profits of all your winning trades so it’s definitely something to be aware of.