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Recency Bias Solutions for Traders

This article is a follow up to my previous article Recency Bias and Why it can Kill Traders. In this article I will offer some helpful solutions that I have seen work for many traders. The first step in fixing a recency bias is simply having an understanding that it is a real phenomena that can definitely cause problems not just for trading but also in many other areas of life. Conviction Conviction is confidence and the best way to build confidence is to succeed at something consistently over a sustained period of time. In trading the only way to succeed over time is making sure that you never deviate from your trade plan. This is something that you must do more than just a few times, you literally need to place dozens if not hundreds of trades in order to truly understand how your trading edge will perform. If you allow recency bias to cloud your good judgement then you run the risk of altering your edge in an adverse way. It is incredibly difficult to succeed at pulling profits out of the market over the long run if you are constantly changing the way you enter and exit trades. I have written 2 other articles that go a bit deeper into conviction and your trading edge which might be helpful if you think that recency bias is affecting your trading. How to build Conviction in your Trading Having an Edge in your Trading Understand the Bigger Picture One trade does not make you a good or bad trader. Rather, it's how you perform over months and years that makes you a good or bad trader. You need to understand that your trading results will be a random distribution of winning and losing trades. It's definitely not any fun for any trader to lose 8 trades in a row but if you are an overall profitable trader and you zoom out and look at your last 200 trades you will see the bigger picture. Those 8 losing trades may look insignificant in the grand scheme of your entire trading career. Losing trades are and always will be a part of the game but you have to remember that sometimes losing streaks happen and that doesn't mean that you are a losing trader. I have heard people refer to recency bias as looking at individual trees rather than the forest. If you think of your entire trading career as the forest and the individual trades as the trees then you can see that a few losing trades are just a couple trees in the vast forest of your trading career. You should not let a couple bad trees burn down the entire forest. Keep a Trading Journal or Diary This is a great idea for helping you keep track of trades that you inevitably forget about over time. It will help you to view your overall career rather than just focusing on a few annoying losses that happened recently. Keeping a trading diary or journal will allow you to look back and see the mistakes you might have made and then bring them into your conscious mind. This is helpful because often enough the mistakes you make in trading (or the rest of life) are subconscious (like switching systems of tinkering with your edge). This also is a track record of how you felt while you were in your trades and can offer many useful insights into how you might go about improving your trading performance or simply understanding that losing streak happen from time to time. Tune into what is Happening in the Market Now It’s not enough to just scan the news now and then. If you want to be successful in the long run you must be constantly focused on what is moving price and how the fundamentals and sentiment are playing out each and every day. The speed of information is incredible these days and you need to make sure that you are not making a trade based on yesterday’s news when today there was something that negated that prior news. If you are a technical trader you should still be aware of what news is coming out and how it could potentially impact your trades. Keeping up to date on the flow of information can give you more conviction in your open trades and help keep you in when you are supposed to be in and out when you should be on the sidelines. Be Self-Aware Being self-aware is more than just knowing that you are breaking your trading rules and suffering a bout of recency bias. It's about being completely honest with yourself and removing your ego. Take you ego out of trading and enjoy a slice of humble pie. If after a series of losing trades you have a tendency to grab at profits far too early from what your plan states then you need to be completely honest with yourself about why you are doing that. Could it be that you have carried over those emotions from the recent losses into new trades that have nothing to do with those losing trades? Each new trade needs to be completely removed from previous trades whether they were winners or losers. I don't mean to say that any of this is easy because it's not and trading profitably is not easy either. I have been trading for about 10 years now so how I react to a series of losing trades will be completely different to how someone who is just starting out will react. My best suggestion for new or struggling traders over and above anything else I have written on recency bias is this:

  1. Find an edge that is proven and learn everything you possibly can about it.

  2. Once you know how to trade your edge practice, practice, practice and track everything you do including how you felt before, during, and after each trade.

  3. Focus on becoming self-aware with the goal of being the world's most disciplined trader.

  4. Once you have learned your edge and have some practice focus your efforts massively on good trading psychology.

A huge part of what I teach my students is trading psychology because once you have mastered your edge the most important thing to your trading success will be your state while you are trading. You can contact me about that or check out the many amazing books on the subject of trading psychology for more help. Find an edge, master it, practice the heck out of it, track it, keep calm and carry on. Thanks for reading and I hope you found some value here.


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