| Updated: October 23, 2025Recency bias and its influence in trading
You will learn about the following concepts
- What does it mean?
- What are the effects of recency bias?
- What could be done in order to avoid these effects?
Have you ever wondered why, every single day, we rely on habit to perform our usual activities? For example, we walk the same way to work, visit the same restaurants, shop at the same grocery stores, etc. We simply rely on habit to do all this the easy way, because who would want to reinvent their life every day? However, this tendency to form habits, known as recency bias, may prove to be a false friend, as it can prompt us to make decisions we might not otherwise take. This is particularly true when trading financial instruments.
What does it mean?
Recency bias is the tendency for traders to attach greater importance to their most recent trading performance, news or information, rather than taking earlier data into account. Recency bias can adversely affect a trader’s perceptions, decisions and judgement, because it may undermine overall performance.
Let us provide an example. A trader, depending on their trading system (based on fundamentals or technicals), may enter hundreds of trades a year. They may register more losing trades than winning ones, but the profit from a single successful trade is usually at least three times the size of a loss. Let us provide two scenarios.
First, a sequence of trades may look like this:
Loss, Win, Loss, Loss, Win, Loss, Loss, Loss, Win, Loss, Loss, Loss, Win, Loss, Loss, Loss
Here we have 12 losses and only 4 successful trades, but because the profit from one winning trade is three times greater than a loss, the net effect is zero.
Second, a sequence of trades may also look like this:
Win, Loss, Loss, Win, Win, Win, Loss, Loss, Loss, Loss, Loss, Loss, Loss, Loss, Loss, Loss
Again, we have 12 losses and only 4 successful trades, but, for the same reason, the net effect is zero.
Although the net result of the two sequences is identical, the trader may feel differently about the trading system after the second sequence. The last eight trades in the second sequence were all losses, while in the first sequence there were two profitable trades out of eight. As a result, the trader may begin to doubt the reliability of the system: is it still valid; does it need to be adjusted to the new market conditions; should different indicators be used and the risk on the next trade reduced?
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What are the effects of recency bias?
One negative effect of recency bias is its potential to alter a trader’s state of mind. Few things are worse than a long sequence of losing trades, which can dampen enthusiasm. The trader begins to question their abilities, falling into self-doubt. With this loss of confidence, the trader starts to expect poorer performance and, as this mindset deepens, bad results inevitably follow.
However, what seems like a positive impact of recency bias can also prove devastating for a trader. In the example above, if the second sequence contained eight consecutive wins, the trader might become less cautious and even overconfident, take excessive risks and compromise their trading discipline, which could eventually lead to catastrophic consequences – financial ruin.
What could be done in order to avoid these effects?
First, every trader needs to recognise the presence of recency bias. Memories of recent trades are likely to be filed away in one’s long-term memory and will not be readily recalled. Therefore, maintaining a trading journal is essential.
Second, a trader needs to develop the habit of tracking past performance. By recording an extended sequence of trades, they are more likely to see the bigger picture.
Third, a trader must learn how to manage themselves. If subjected to excessive stress and anxiety, they are more likely to abandon common sense and deviate from sound trading practices. Controlling one’s emotions is the key to remaining in one’s normal working mode.