What is Risk on Risk off?

Not the same as wax on wax off right.
I hear these terms but do not completely understand them. would someone kindly enlighten me.

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Let’s take an extreme situation as an example - let’s say diplomatic relations have broken down and the US is on the brink of a major foreign military intervention. And this has the potential to bring in additional countries as allies on both sides, and may block trade through a strategic region by non-combatant neutral countries.

This is a very high risk moment at which to pile money into any new investment. In fact, its even high risk to leave money in any speculative investments. The market has rotated from risk-on to risk-off. At this point, many investors will want to move money from speculative investments to safer havens. So they sell their Nasdaq stocks and put the money in gold or US government bonds. And they sell their AUD and NZD and convert these into CHF or JPY or gold.

You can recognise risk-on when the Dow Jones goes up, risk-off when gold goes up. In reality, actual situations will be less extreme but the Dow is a good risk indicator, even for forex.

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In FX Jpy is often viewed as a risk currency - Japan is seen as a nation of savers/investors and in trouble times they bring their money home i.e. buy Yen (whether this happens in real life is irrelevant - it’s what the market thinks that matters).

Likewise Gold is a safe haven in trouble times.

But Tom is right about US stocks - look at Friday past - reasonably positive statements from the US and China re their trade talks and see how the USD2000 responded.

XAU/USD was bought Friday but given how stocks performed would it be a good idea to buy Gold Monday?

Anyways I posted about risk couple days ago here:

Edit: notice that I was mentioning investors being bullish back on Wed using the sectors of S&P etf’s and then again Thurs - the USD2000

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Very interesting

“Risk on and Risk off”, also known as “RoRo” is shorthand for global market sentiment.

When investors are optimistic about the outlook for the economy, or feel that markets are mispricing the outlook, they will bid up the price of riskier assets.

That’s “risk on.”

Sometimes fresh economic data or alarming news drives up uncertainty about the future, as on a day when doubts piled up about everything from Brexit to China trade talks to Turkish lira to nuclear talks with North Korea.

When that happens, investors tend to sell risky assets in a hurry and buy assets seen as safe havens, ones that are usually less vulnerable to a weakening outlook or deteriorating investor confidence.

That’s “risk off.”

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I thank you for your reply, it is a lot clearer now. Once I write it down a couple of times it will stick.

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Many thanks for you reply, better understanding now.

It is also helpful to make the distinction between the currencies that are usually associated with"risk on"’ or risk appetite versus the currencies usually associated with “risk off’” or risk aversion.

Out of the top eight currencies in the forex market, here are the two main groups

  • Risk-off currencies: JPY, CHF, USD
  • Risk-on currencies: AUD, NZD, CAD, EUR, GBP

Gold (XAU) is also seen as a safe haven, a risk-off asset that preserves value in dangerous or at least perceived volatile times.

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there seems to be so much money that can be earned through the forex market.

this is really useful thanks for the info

First let’s clarify what you mean by being rich? I know people who are making some decent money by trading on Forex, somebody can call them reach, for other people they are just relevant. If you want to be successful in trading it is a good idea to become inspired by success stories, and I’m sure you will find plenty of them.

Strong Swiss Franc and weak Euro is risk off.
Strong US Dollar and weak Japanese Yen is risk on.

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Who said anything about being rich?
Maybe you clicked on the wrong thread?

In simple language risk on refers to the positive situation on the market, when investors see that the economy is stable or even growing and they are risky enough to take actions. In case there is some uncertainty in the future then there is a tendency to sell risky assets. This is what we called risk of.

a very interesting answer. good luck

Risk on risk off is an investment setting in which risk tolerance has an impact on price behavior. When the risk is low, investors engage in high-risk investments.

No arbitrage condition says there are no surefire profit opportunities (or they are too short-term). Hence when you choose between safe Treasury bonds and risky stocks despite difference in expected returns, you can’t say with certainty that realised return on a stock will be higher than on a Treasury bond because stocks are more risky investment.

So basically investment decisions are a choice between the level of risk you want take. When investors in general on a particular day are risk averse (choose safe assets more instead of risky investments) we say that there is risk-off on the market and vice versa.

I totally agree

In risk-on setting, you buy riskier assets due to factor such as favourable conditions of the economy and in risk-off setting, you buy the less risky assets due to unfavourable conditions of the economy.

OK, I thought I had Risk On - Risk Off figured out, but I guess I don’t.

When you say USD, JPY, CHF are Risk Off does this mean they will be increasing in value over other currencies or decreasing during a Risk Off time?

Also is it normal to have Risk off one day and Risk on the next?