Have you ever not taken a trade and then looked back in hindsight and wanted to kick yourself? Ever entered a great trade and exited too early due to low confidence or over-thinking it, only to see the trade go on to be a huge winner? How often do you find yourself in these situations or similar?
Truthfully, these situations are unavoidable sometimes, but if you’re finding that you are in a constant state of frustration and regret with your trading decisions you need to do something about it.
What if there was a way to reduce these trading errors and the mental pain that comes from them? What if you could start getting onboard these big trades that you talked yourself out of entering? What if I could help you cure this mental condition and finally set you free?
I have good news and perhaps bad news (depending on how you look at it). The good news is: This article is going to help you understand what is causing these problems and hopefully give you confidence to rectify the issue and start nailing some of these trades you keep letting get away. No more living in hindsight saying “I was going to take that trade, but…” or “I was going to let that trade run, but…”. The “bad news” is that I can’t do the work for you, I can show you the proverbial “door” to success, but it’s up to you to walk through it.
So, if you’re tired of standing in the same spot, getting nowhere fast, here is the path, all you have to do is start walking down it…..
Learn what recency bias really means and how to stop it
Humans tend to make decisions about the future by looking at the past and for good reason; this is usually a very helpful behavior that can prevent us from repeating the same mistakes over and over. However, although this evolutionary instinct has helped us move forward over the centuries, in trading, it tends to work against us. We call ourselves “optimists” when we learn from the past, and indeed that is typically a very optimistic thing to do, but in trading, in an environment with so many random outcomes, it can make us “pessimists” very quickly.
Allow me to explain with an example….
We tend to think that what happened recently in the past will impact what is about to happen next, and in MOST situations that would be true. However, in trading, there is a random distribution of winners and losers for any given trading edge. So, this means you never know for sure which trade will win and which lose, even if your edge is say 80% profitable over time. Even in a very small sample size of 3 winning signals and 2 losing signals on a random section of a chart, a trader could take 1 of the losing trades in that series and get mentally “shaken out”, meaning they freeze like a deer in headlights and skip the next perfectly good signal purely due to the recency bias in trading. In other words, they are being overly-influenced by the past / recent trade’s results when in reality, those outcomes have little to nothing to do with the next trade’s outcome.
An example of recency bias in action:
Now, let’s look at a recent real-world example of how recency bias can negatively impact your trading:
If your primary trading edge was pin bars on the daily chart time frame, you would have been taking the first two signals labeled “winning pin bars” on the chart below. These were long tailed pin bars, one of my favorite types. You could have profited from both of those or at worst, gotten out at breakeven, OK, no harm no foul.
Now, things get a little more interesting…
We can then see there were back-to-back pin bars that ended up losing. So, had you taken these two pin bars, if you let recency bias “get you”, there was a VERY slim chance you were taking the last pin bar to the right on the chart; which has ended up working quite nicely as of this writing. This is proof of why you need to continue taking trades that meet your trading plan criteria, despite recent trade failures or outcomes that you didn’t like. You (nor I) can see into the future, so to try and “predict” the outcome of your next trade based only on the last, is not only futile, but stupid.