The recency effect occurs because we tend to place more emphasis on recent events, even if other data may be equally or more important.

The recency effect occurs because we tend to place more emphasis on recent events, even if other data may be equally or more important. What just happened is fresh in the memory and leaves a deeper impression than something that happened earlier. Because the mind places more emphasis on recent events, this also affects our expectations for the future.

The recency effect can have a variety of impacts on trader behavior.

For example:

When traders predict the market outlook, they tend to pay more attention to recent price movements.

If an entry pattern has just been successful and now the entry conditions are met again, traders are likely to have greater confidence in the entry pattern than they should based on past performance statistics.

If a certain entry pattern has recently suffered a loss, many traders will find it difficult to enter the market based on this entry pattern again, especially if it is not long after the loss.

Whether a trade results in a profit or a loss, recent experiences can have a strong impact on a trader's psyche.

Traders seem to think that the results of recent trade A will directly affect the results of future trade B.

We know (or should know) that this is not true. Each transaction exists independently and does not interfere with each other. Transaction A does not affect transaction B, but because of this cognitive error, we act as if the two are related. Trader behavior is influenced by the recency effect (a psychological blind spot).

We place undue emphasis not only on recent external events, such as market performance or entry patterns, but also on our trading performance.

If our trading performance is good, a series of transactions are successful or excess returns are achieved, we may have recent experience that affects our next trading actions. We tend to think that we have a hot hand, or that our skills and abilities are somehow improving quickly, or that our ability to read the market is better than others. As a result, we may make unforced trading errors, such as adding to positions, over-trading, or reluctantly trading when entry conditions are not fully met. This affective heuristic bias (taking things lightly because you feel good about yourself) may reinforce and amplify recent good performance.

If we place too much emphasis on recent performance, it may affect our current attitudes and behaviors, often causing us to deviate from our trading plan or, more often, deviate from rational trading.

Traders tend to pay too much attention to not only profit performance, but also loss performance. Traders who have underperformed recently may exit the market as a result to avoid the prospect of further underperformance, or conversely, add to their losses or make additional trades in order to regain lost ground.

In any case, it is important to note that traders will place too much emphasis on recent events or actions, directly affecting the next move. This often leads to unstable trading behavior, increases the probability of making unforced trading errors, and causes unnecessary losses.

There is a golden house in the book "In-depth Stock Trading Psychology"