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.

Tesla at all-time highs at $1,007.98

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/Off Markets

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.

http://www.cboe.com/vix

Conclusion

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.

https://a1trading.com/vip-membership-m/

Disclaimer:

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.

Looking for a Broker?

Check out our favorite brokers & reviews! Find brokers available in your country, or our top rated brokers to consider.
Find a Broker
More Articles
January 17, 2021
Weekly Forex Forecast for GBPUSD, CADJPY, GBPAUD, XAUUSD (17-22 January 2021)

Weekly Forex Forecast for GBPUSD, CADJPY, GBPAUD, XAUUSD (17-22 January 2021) Hey everyone! Welcome to this week's forex forecast for the week ending January 22nd, 2021. I'm TraderBart with A1 Trading, and this week I'll be looking at GBPUSD, CADJPY, GBPAUD & XAUUSD. GBPUSD Looking at GU on the Daily timeframe, price has been channelling […]

Read More
January 10, 2021
Weekly Forex Forecast for GBPUSD, EURCHF, USDJPY, XAUUSD (10-15 January 2021)

Weekly Forex Forecast for GBPUSD, EURCHF, USDJPY, XAUUSD (10-15 January 2021) Hey everyone! Welcome to this week's forex forecast for the week ending January 15th, 2021. It's so great to be back, I hope everyone's had a fantastic holiday, and I hope everyone's motivated to work 10x harder than last year. I'm wishing everyone nothing […]

Read More
December 21, 2020
Top Trading Ideas for 2021

Throughout the year, we've seen many changes to the way we trade, how we manage risk and how we interpret the markets. The new insights we have gained over the months usually come after years of trading and adapting to ever-changing environments. We've done all that in a matter of months! Up until the New […]

Read More

Related Articles

August 28, 2020
Economic stimulus and the Role of Central Banks

Politics preventing new financial stimulus The economic recovery in the major global economic powers depends on several important factors. One of the most vital part, the spread of the virus and the government's answers to it. With a decrease in daily cases of COVID-19 to 50,000 in the U.S.A. Yet U.S. A remains the most […]

Read More
August 26, 2020
How to Spot a Scammer

Our team has unfortunately received many reports of scammers using our content and pretending to be us.¬†While we will continue to report these accounts to the authorities as we receive reports, we may not always catch them in time. Below our a list of things to look out for before making a purchase to any […]

Read More
August 22, 2020
Legends of Investing - The Story of Warren Buffet

Warren Buffett is one of the most idolised, investors in the world. At the time of writing , his company, Berkshire Hathaway, has a market cap of $495 billion and Buffett himself has a net worth of $79 billion. His approach to value investing, combined with his influence over the companies he invests in , […]

Read More

A1 Trading Company

A1 Trading Company is a financial services and media business founded in Atlanta, USA.
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram