Recency bias is the tendency to overweight recent events and outcomes when making decisions, while underweighting longer-term data. In trading, this manifests as assuming recent market conditions will persist indefinitely — expecting further gains after a rally or further losses after a crash. Recency bias creates a dangerous feedback loop where traders chase recent performance rather than evaluating current probabilities objectively.
Overweighting recent trades, wins, or losses in decision-making. Assuming recent market conditions (trending, ranging, volatile) will continue. Performance chasing: allocating to assets that have recently performed well. Strategy abandonment: discarding a system after a short losing streak. Recency bias is strongest immediately after an emotional event.
Before entering, review performance over a statistically significant sample size (50+ trades), not just the last few. Evaluate whether the current setup meets your system's criteria regardless of recent outcomes. Check whether you are drawn to an asset or strategy because of its recent performance rather than objective edge. Use systematic rules to prevent recency-driven entries.
Do not abandon a strategy after a short losing streak — check whether the drawdown is within historical norms. Avoid holding positions longer than planned because 'the trend has been working'. Exit based on predetermined criteria, not on extrapolation of recent price action. Review trade journals quarterly to maintain long-term perspective.
Ongoing self-assessment; particularly important during strategy review and portfolio rebalancing
Combat recency bias by maintaining detailed trading statistics over long periods — when you can see that your current drawdown is within the normal range of your system's history, you are less likely to panic and deviate. Deliberately seek out counter-examples to your current bias: if you have been bullish recently, study bear market scenarios. Time-decay your weightings — give equal importance to all data, not just the most recent.
The disposition effect describes the well-documented tendency of traders to sell winning positions too early to lock in profits while holding losing positions too long in the hope that they will recover. This behaviour, rooted in loss aversion and mental accounting, systematically reduces profitability by cutting winners short and letting losers run — the exact opposite of what profitable trading requires.
FOMO (Fear Of Missing Out) drives traders to enter positions impulsively because they see prices rising or because social media is buzzing about an asset. Herding behaviour — following the crowd — amplifies FOMO by creating social proof. Together, these biases cause buying at tops and chasing momentum that's already exhausted.
Confirmation bias is the tendency to search for, interpret, and remember information that confirms your existing beliefs while ignoring contradictory evidence. In trading, this means once you form a bullish or bearish view, you unconsciously filter information to support your position — ignoring warning signs and overweighting supportive data.
Anchoring bias occurs when traders fixate on a specific reference point — such as their entry price, an all-time high, or a round number — and make subsequent decisions relative to that anchor rather than evaluating current market conditions objectively. This bias leads to irrational behaviour such as refusing to sell a losing position because the anchor (entry price) feels more 'real' than the current price.