Recency Bias in Trading: Stop Letting Recent Results Cloud Your Judgment
Even with systematic trading, recency bias can sneak in. After all, we are still human. For instance, a trader might be tempted to override their system after experiencing a string of losses, thinking the system is broken because it hasn’t worked in recent trades. This can lead to abandoning a perfectly good system right before it starts performing again.
Another challenge is backtesting. Traders may unconsciously focus on recent market behavior when backtesting their systems, assuming that the last few years of data are the most relevant. This could lead to over-optimizing for short-term trends that may not continue.
To manage these challenges, traders need to trust their systems and maintain discipline. Confidence in the system comes from understanding its historical performance and knowing that every strategy will have periods of drawdown.
