Recency Bias
Overweighting recent outcomes when judging what is likely to happen next.
Also called: recent bias
In plain language
A few recent wins make a strategy feel better than the data supports; a few recent losses make a sound strategy feel broken.
It drives the most damaging cycle in trading: sizing up after a good run and abandoning the approach during an ordinary drawdown.
Normal variance is far larger than intuition suggests. Runs of five or six consecutive losses are entirely expected at typical win rates.
Why it matters
Recency bias causes traders to make their largest bets right before mean reversion and to quit right before recovery.
Common mistakes
- Increasing risk after a winning streak.
- Abandoning a strategy after a normal-length losing run.
- Judging performance over ten trades rather than a hundred.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The average amount you expect to win or lose per trade over a large sample.
The percentage of your trades that close at a profit.
The decline from an account’s peak value to its lowest point before a new peak.
A record of every trade, including the reasoning behind it and the result.
The fixed share of your account you are willing to lose on any single trade.