Cognitive Traps in Trading: Overconfidence, Recency Bias & Revenge Trades

Jasper Osita - Market Analyst

2025-11-04 09:40:14

Mark Douglas would say the market is perfectly neutral; it’s our interpretation that distorts it. When you catch yourself forcing a setup that isn’t there, you’re not “seeing price” anymore-you’re seeing your bias. The antidote is a probability mindset: think in series, not single outcomes, so you no longer need to be right on this trade to be right over the next twenty. If you haven’t yet, warm up with Thinking in Probabilities and frame your sessions with Flow State Through Structure-structure keeps emotion in its lane.

Overconfidence: When a Streak Pretends to Be Skill

Overconfidence doesn’t swing the door open; it slides a business card into the lock. Three winners in a row and rules “flex”: stops get loose, size creeps up, and you invent exceptions to your checklist. The illusion is control; the reveal is variance. Anchor confidence to process, not P/L.

Field test (indices open): If you trade the bell, reduce your universe to one, well-rehearsed play. For example, the impulse → pullback → confirmation sequence in How to Trade & Scalp Indices at the Open Using SMC. Let the playbook, not the streak, decide size. When you feel “extra sure,” downshift to baseline risk-paradoxically, that’s how you keep equity curves smooth.

Pre-click filter:

“Would I still take this if my last three trades were losers?” If the answer wobbles, you’re riding emotion. Re-anchor with Execution Psychology: Turning Hesitation into Confidence and keep your price action criteria objective via Mastering Price Action at Key Levels.

Recency Bias: Dragging Yesterday Into Today

Recency bias is emotional residue. Win streak? You expect continuation and over-risk. Loss streak? You expect pain and pass on valid A-setups. Today’s chart deserves a clean read, not yesterday’s weather.

Reset ritual: Between trades, stand up, breathe, and read a one-liner: “This trade is independent.” Then verify your setup with a neutral checklist like The Confirmation Matrix. If the stack (e.g., liquidity sweep + displacement + FVG + MSS) isn’t there, do nothing. Doing nothing is a position.

Gold on data week: When CPI looms, narratives get loud. Zoom out with Complete Step-By-Step Guide to Day Trading Gold (SMC) and plan exits with How to Exit Gold Trades with Confirmation. The point isn’t prediction; it’s preparation: where is invalidation, where do you scale, and where do you stop clicking?

Revenge Trading: When Ego Puts on the Headset

Revenge trading feels convincing because urgency masquerades as clarity. You don’t want your money back-you want your identity back. That’s why it escalates sizing and deletes confirmations.

Interrupt protocol: Two losses in a session = close platform, open journal. Use Trading Journal & Reflection – The Trader’s Mirror and label the sequence: trigger, thought, urge, action. If a classic stop hunt created the pain, study it objectively with Stop Hunting 101 and How Stop Hunts Trigger Revenge Trading-naming the trap removes its teeth. Protect the account with Risk of Ruin – Respect the Math; survival is an edge.

The Pilot Analogy: Fly the Instruments, Not the Turbulence

Pilots don’t white-knuckle through chop; they trust instruments and training. Your “instruments” are risk caps, a session stop, and a confirmation stack. When the cabin shakes (volatility spike, news knee-jerk), read, don’t react. If indices are your lane, plan your turbulence with Mastering the New York Session (SMC) so a pullback, continuation, or reversal has a prewritten response-not an improvised one.

Pre-Mortems Beat Post-Mortems

Most traders do post-mortems after the damage. Pros run a pre-mortem: “If this trade fails, what did I likely miss? If it wins, where do I mess it up?” Write two lines before entry:

Failure line: “If this loses, I probably ignored X confluence or front-ran confirmation.”
Success line: “If this wins, I’ll likely mismanage by Y (early TP, no add, trailing too tight).”

Then defend against both with Mastering Risk Management and How Much to Risk per Trade. A plan for losing and a plan for winning are equally important.

Micro-Case Studies (So You Can See It)

Case A – Overconfidence at the open (NAS100):

You nail two opening drives Monday/Tuesday. On Wednesday, you size up and click the first green candle. Liquidity clears, snaps back, you’re offside, you “give it room,” then add. Classic. Instead, run the Scalping Indices at the Open (SMC) flow: wait for sweep → displacement → iFVG tag → structure break confirmation. Same pattern, same risk, every day.

Case B – Recency bias after a losing day (Gold):

Yesterday’s chop becomes today’s fear. A-setup prints; you hesitate and miss the clean move. To reset, reread the plan and run the matrix: is Price Action at Key Levels present? If yes, execute baseline risk. If no, do nothing. Clean.

Case C – Revenge after a stop hunt (GBP/JPY):

You’re wicked out by one pip and immediately market-buy back in with double size. That’s ego. Instead, label it, leave, and study Outsmarting Stop Hunts: The Psychology Behind the Trap. Re-enter only when your confirmation stack reappears.

Practical Rewires You Can Install Today

Batch in 20s. Score execution (A/B/C) and note bias triggers. Over time, the emotional tells are louder than the drawdowns. This is the backbone of Trading Mindset: Confidence Through Data.
One-page anchor. Print Risk Management – The Only Edge That Lasts and tape it to your monitor. Read it before the bell.
Bias labeling aloud. “No overconfidence. No recency. No revenge.” If any shows up, stand up 90 seconds and re-check The Confirmation Matrix.
One session, one play. Indices? Use the open playbook above. Gold? Keep Day Trading Gold (SMC) pinned. This constraint is a gift to your nervous system.

If you want a broader toolkit to sharpen confluence, see Moving Averages Playbook and How to Use Fibonacci to Set Targets & Stops-but only as confirmations, never as substitutes for a plan.

Challenge This Week

Choose your most frequent trap (overconfidence, recency, or revenge). For the next five sessions:

Log every urge related to that trap, time-stamped.
Rate each urge’s intensity (1–5).
Add one friction that intercepts it (timer, baseline size lock, 2-loss session stop).

Close the week with a one-page summary: triggers, worst hour, best intercept. Next week, pre-install the intercept before the session.

Final Thoughts

As Mark Douglas said, “You don’t need to know what will happen next to make money.”

You just need to operate without distortion - trusting your system more than your emotion, and your probabilities more than your pride.

Mastering the market begins with mastering the mind that trades it.

FAQs

1. How do I tell confidence from overconfidence?

Confidence is trusting your process; overconfidence is trusting this outcome. If size grows faster than your validated sample supports, you’re already over the line. Re-anchor with Mastering Risk Management.

2. What’s a fast reset for recency bias?

Stand up, breathe, read your plan, and verify live criteria with Price Action at Key Levels and The Confirmation Matrix. If it’s not there, you’re projecting.

3. How do I avoid revenge trading after a stop hunt?

Name it, pause, and journal using The Trader’s Mirror. Study Stop Hunting 101 to de-personalize the move.

4. What should I read next?

Pair this with Detachment Discipline and Trading Hack: Why You Keep Breaking Your Own Rules to harden your behavioral edge.

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作者

Jasper has been in the markets since 2019 trading currencies, indices and commodities like Gold. His approach in the market is heavily accompanied by technical analysis and of course, supported by fundamentals. He has a background in trading proprietary firms and has been teaching students how to navigate themselves in the markets from basic to advance concepts.