The Pitfalls of Recency Bias

Let’s talk about something we’ve done as traders (and in life too) without even realizing it: we’ve let the outcome of our last trade mess with our next one. Sound familiar? This isn’t about learning a valuable lesson from the market, like when we say, “Okay, I got stopped out, the market just wasn’t ready to go that way.” That’s wisdom! What I’m talking about is when you let the result of your last trade change your whole game plan for the next one. This is a whole different beast, and it’s called Outcome and Recency Bias.

Outcome and Recency Bias can seriously derail your trading because it tricks you into thinking the next trade depends on the last one. But the truth is, every trade is an independent event, and changing your strategy because of how you feel about your previous result? That's emotional trading, not professional trading. Let’s dive into an example to break this concept down a bit.

Meet Stacey. She took a trade in crude oil futures and decided to go long at a demand zone on a 15-minute chart but since the trade setup was based on a countertrend, oversold market with her zone located in a higher timeframe zone, she had a choice: as an experienced trader, she could take a more advanced approach by setting a Limit Entry and sticking to her rules, or she could play it safer with a Confirmation Entry, watching the price action unfold first. Feeling confident—having had no recent wins or losses clouding her mind—, she chose Limit Entry, trusting her setup.

Boom, she’s in! Things start going her way... and then, out of nowhere, the market turns, drops, and she gets stopped out. Now, getting stopped out isn’t the real problem. The issue starts after the trade, but before the next trade, when she can’t shake the emotions that come flooding in. Instead of letting it go and moving on, she carries emotion and feelings from the loss into her next trade.

So what happens next? Stacey spots the same setup, but this time she hesitates. Instead of placing the trade the same confident way she did before, she switches to a Confirmation Entry and misses a trade she would have been able to enter and profit from had she stuck with the rules that permitted her Limit Entry. Why? Because she’s second-guessing herself. Maybe she's thinking the first trade was wrong, or she's afraid of losing again, so she changes her plan. It feels safer, right? But here's the catch: the change wasn’t part of her trading strategy—it was driven by fear and self-doubt.

And that’s the danger of Outcome and Recency Bias. Looking back at the most recent outcome, applying a qualitative interpretation to the outcome, and modifying the plan for the next trade with a completely false new expectation of the quality of the next outcome with no causation or correlation from the last trade outcome. It’s bonkers, just like being human! It tricks you into changing things on the fly, convincing you that you need to tweak your approach when, in reality, you’re just reacting emotionally. Whether it's cutting your position size out of fear, or avoiding a setup you know works, you’re letting the outcome of a past trade shape your future one—and that’s not how consistently profitable traders operate.

Let’s flip the script for a second. What if Stacey’s last trade had been a winner? Same problem! She might still fall into the same trap but in reverse. Maybe she gets overconfident, doubles her position size, or widens her stop loss just because she feels unstoppable from the last trade. Again, none of this was in her trading plan—it’s all emotion-driven.

So, what’s the lesson here? We’ve all been Stacey at some point. It’s human nature. But the real key to success in trading is mastering emotional discipline. You have to let go of whatever happened in your last trade—win or lose—and go into the next one with a clear head. No Recency Bias, no emotional baggage.

Here’s a little challenge: on a scale of 1 to 5, how well do you handle your emotions after a trade? Are you a 1, letting emotions rule your trading decisions? Or are you a 5, tough as nails like Stone-Cold Steve Austin, unfazed and ready for the next move? Be sure, the closer you get to that 5, the better trader you’ll become.

Remember, becoming a successful trader isn’t simply about your strategy, your setup, or the market you’re trading—it’s about staying true to your rules and letting logic and science, not emotions, guide your decisions. Maybe we could call it the “50 First Dates” mentality?

So, let’s learn to let it go and get ready to crush that next trade, and then let it go!