What Determines "Risk-On" And "Risk-Off" Sentiment?
Featured Photo: https://media.istockphoto.com/vectors/speedometer-high-risk-to-low-risk-speed-and-risk-control-concept-vector-id1155406328
What Do Risk-On and Risk-Off Sentiment Mean?
The aspect of risk changes according to the given market circumstances. Sometimes, a play would be considered more risky at that point in time, and other times, it would seem like a safer bet. Risk-on can occur in times of economic prosperity, as in when taking riskier bets are more likely encouraged. In the stock market, risk-on sentiment happened earlier this year after indices fell by a record decline and the Fed announced its stimulus plan. When the Treasury began printing trillions of dollars, the Fed bought in the market, causing an overall surge in prices. That would be an example of a risk-on environment. Investors know that the companies they love are backed by the Fed and will continue to buy shares with a seemingly endless amount of money. We watched as Tesla shares went from $360 to $1,000 in a matter of three months. The Nasdaq reached all-time highs, erasing all losses for the year and more.
Risk-off is when investors avoid the riskier bets, like the stock market, and move towards so-called "safe havens" that won't be extremely volatile. When markets are more uncertain and volatile, people tend to move towards risk-off plays. Let's say the USD is way overvalued and very volatile. Investors might look towards moving their money to gold which is more of a risk-off trade. Overall, if traders are selling and seeking shelter in other things, that is how you know we have switched to risk-off.
Comparing Risk-On Risk-Off
During risk-on environments, potential gains could be massive due to a high sentiment in something. But the catch is that losses can be just as bad. However, if a market is considered risk-on, there is a higher probability that companies will do well and investors will be profitable on their positions. Risk-on is for high yields and general high risk appetite due to confidence.
In risk-off environments, returns are not expected to be high. Usually, returns are very low. General risk tolerance is low as investors just want their money to be safe in the meantime. Although risk is avoided for the most part, investors won't see the gains as risk-on, but their money will be safer. US Treasury bonds have a very low yield on returns, but it's a place to go when the market is selling off and/or there is great uncertainty.
How to Spot Risk-On/OffMarkets
One way investors look for risk is through very big news or other indicators. A good risk off indicator in forex would be high interest rates. The value in any type of currency pair would become risk-off if the country's rates were high. High rates means holding your money will pay you capital regardless of where the price moves. And during a period of low interest rates, risk-on becomes a factor.
Another way investors look for risk is through the VIX, or the "fear index". The VIX is supposed to measure volatility in the market. If the VIX is high, there is a high volatility, meaning there is high uncertainty. More people are afraid to invest when the VIX spikes, and vice versa. In low volatility, risk-on becomes the sentiment. Within the past couple months, the VIX came down hard as investors poured their money into the stock market.
The differences between the two sentiments are extremely important and useful to know when you are trying to trade/invest in currencies, stocks, indices, etc. These behaviors derive from the overall risk tolerance of traders. Economic changes, updates, or patterns, will all reflect the behavior of the market, and hopefully you will be able to use risk-on/off to your advantage.
Thanks for reading! If you are interested in joining our trading community, we have chat rooms, trade alerts from our top traders, and educational content. You can join using the link below, and get a discount on your membership.
Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.
Save time looking for setups with the EdgeFinder's watchlist! In a glance, see the EdgeFinder's current top buys and top sells.
Two surprises occurred this week from both central banks of Australia and Canada. Economists forecasted an unchanged discount rate, but the banks had other plans in mind. This caused a heavy positive move for AUD and CAD after reaction to the news. Here is what we are looking for in these types of pairs going […]
Over the past week, several news events paved the way of sentiment on monetary policy. Through the forest of mixed uncertainty, we can find the clearing of one asset that looks ready to take off. Gold has come back to a critical level, and it is up to smart money what happens next. EdgeFinder Analysis […]
Gold is up nearly half a percent today while USD down a third of one as of 10:18 am EST. As we wait for the upcoming and looming NFP numbers this Friday, we can assess the economic data we already have. EdgeFinder Analysis The stock market sighed in relief after the debt ceiling bill finally […]
DISCLAIMER: All comments made by TraderNick’s Forex Group, LLC are for educational and informational purposes only. All comments should not be construed as investment advice regarding the purchase or sale of any securities or financial instrument of any kind. Please consult with your financial adviser before making an investment decision regarding any securities or financial instruments mentioned by TraderNick’s Forex Group, LLC. TraderNick’s Forex Group, LLC assumes no responsibility for your trading and investment results. All information on any of the platforms utilized by TraderNick’s Forex Group, LLC was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. TraderNick’s Forex Group, LLC, its employees, representatives, and affiliated individuals may have a position or effect transactions in the securities and financial instruments herein and or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading of any type involves very high risk and may not be suitable for all investors. TraderNick’s Forex Group, LLC, its subsidiaries and all affiliated individuals assume no responsibility for your trading and investment result. Read our full disclaimer here