As a Forex trader, you have probably experienced the negative impact of your last trade on your next trading decision. You may be at risk of getting struck by a trading “disease” that often develops following your last trade. This “disease” can have a serious impact on your mindset and prevent you from achieving trading success. In this post, we will identify the issue, help you cure it, and prevent it from returning. Essentially, we are going to “vaccinate” you against one of the worst trading “diseases” that “kills” many Forex traders each year.
Why Your Last Trade Matters So Much
Your last trade can negatively influence your mindset and thus your next trade. Ideally, your last trade should have no effect on your next trade, but far too often, it has a huge effect. This is because Forex traders often become overly-affected by their last trade’s results. As a result, they experience recency bias, which means they focus too heavily on their most recent trading decisions/trades and lose perspective on the bigger picture.
Recency Bias Explained in the Context of Trading
Recency bias can be either winning-streak recency bias or losing-streak recency bias. Winning-streak recency bias occurs when Forex traders on a winning streak become too heavily influenced by that winning streak. This leads to overconfidence, which results in increasing risk size on the next trade and entering trades that violate their trading plan/trading edge. On the other hand, losing-streak recency bias occurs when Forex traders on a losing streak become too heavily influenced by that losing streak. This leads to fear, which results in decreasing risk size below their normal 1R risk amount and entering decreasing number of trades due to fear of losing more.
How to Cure Recency Bias in Trading
The best way to cure recency bias in trading is to avoid it in the first place. This begins with knowledge and education. Once you understand that it’s simply human nature to become overly-affected by your last trade’s results, you will start to become more self-aware and catch yourself in the middle of becoming too influenced by your last trade. You can distract your brain from obsessing over negative thoughts (like a losing trade, for example) and even physical pain by using positive trading affirmations and meditation.
Make sure you are sticking to your predefined risk on every trade and not over-trading. Remember that any given trade’s results are simply one instance of your edge in a large series, so looking at the results of ONE trade within a chain of say 20 to 40 trades, is completely pointless. If you are managing risk properly on every trade and sticking to your trading plan, you should not be surprised or overly-emotional about the results of your last trade, win or lose.
Edge vs. Emotion
Your trading edge is the basically the entry trigger that played out over a series of trades, this provides you with a better than random chance of making money. However, your emotions can impact your ability to trade the edge. Thus, your last trade needs to be irrelevant to you, so that you can truly let your trading edge play out over the series of trades it needs to MAKE YOU MONEY.
Trade like a Hedge Fund
Top-performing hedge fund managers know that to make money for their clients, they must be calm, collected, and calculating. Similarly, you cannot afford to constantly jump in and out of the market, transaction costs aside, trading like a day trader is simply not conducive to the proper trading mindset. If you want to trade like you are running a top-performing hedge-fund, you better get ready to do a lot more study and observation and a lot less actual trading
the key to overcoming the negative impact of your last trade is to understand the nature of recency bias and the random distribution of wins and losses in trading. By training yourself to view each trade as just one instance in a series, and by sticking to your trading plan and managing risk properly, you can avoid being overly influenced by the emotional highs and lows of individual trades.
To trade like a top-performing hedge fund manager, you should focus on fewer, high-quality trades rather than constantly jumping in and out of the market. This will help you to maintain a calm, collected mindset and avoid the negative impact of recency bias on your trading decisions.
Ultimately, becoming a successful Forex trader requires discipline, consistency, and patience. By vaccinating yourself against the plague of recency bias, you can ensure that your last trade does not dictate your next move in the market and stay on the path to long-term trading success.