What is Risk on Risk off?

Trading Discussion News and Economy
23

Mike, 1) Theoretically, increasing during Risk Off and 2) Yes and no. Sorry, it’s not black and white.

If the market tone is viewed as Risk On this means investors are prepared to “gamble” more so they may pile into Tech stocks, Bio Stocks or the S&P etc (often with leverage) where the general risk is higher but the returns are also higher.

Risk Off on the other hand is where investors are more risk averse due to various reasons such as Fed monetary policy, a terrorist attack, natural disaster, black swan event etc so they want to take their money out of risky Tech/Bio/S&P stocks and instead place funds in assets which are deemed less risky, but generally speaking with a lower rate of return. These asset classes could be Gold, Yen, Dollar, Swiss Franc, Bonds etc, so theoretically, if more investors are buying “safe” assets such as Gold/Yen/Dollar/Swiss Franc, they will rise in value.

Oh and if anyone ever tells you that the market is Risk On (S&P should rise) so it means USD has to go down, ignore them. They often rally together, fall together, but sometimes also have an inverse relationship.

This type of sentiment comes and goes. View it as rule of thumb that sometimes happens rather than a hard and fast rule.

Risk On one day to Risk Off the next day is fairly normal. It all depends on what happens around the world with regards to geo-political events, high impact economic news or something as simple as it being an Amazon prime day (believe it or not). For instance, Amazon announce 2 days of heavily discounted products, investors believe this will increase Amazon’s share price so they invest in Amazon and perhaps other FANNG stocks as they often rally together. This generally means these investors will pull their money from safe-haven assets such as gold and bonds so they can take advantage of the likely S&P rally. This is Risk On. But then, the day after the Amazon sale, Turkey bomb a neighboring country for whatever reason which sparks concern across the world as political leaders come out and condemn the actions of Turkey. This makes investors risk averse due to the uncertainty so they may take all their profits from the Amazon/S&P rally and perhaps even the majority of their entire capital and put it in US or German 10Y bonds (or currencies like Yen, USD, CHF) as they have the highest interest rate at that particular time, until things calm down. This market would be viewed as Risk Off.

Hope that helps mate.

1 Like
24

HappilyNorth, Thank you

That helped for sure. I appreciate you taken the time to explain that.

25

This topic has been covered in a couple articles on BabyPips.com.

Here are some helpful links:

26

Risk off assets have the status of safe haven investments, they advance when expectations are bearish. Risk On assets are growth oriented and the advance when expectations are bullish.

27

Great explanation. Thank you.

28

Risk off assets have the status of safe haven investments, they advance when expectations are bearish. Risk On assets are growth oriented and the advance when expectations are bullish.

29

This makes it really clear . It was a great read buddy.

30

This afternoon friends we’re risk-on. All the way to the bank.

31

These are terms that are very common in any set ona business process. You can never have certainty that whatever you plan as a trader will always succeed. You must have to risk for you to become successful in life. It is very important for you to learn from experience, by risking. Sometimes, you need to be very careful in order to increase your productions.

32

I have tried to understand these terms but am literally defeated. I know what risk is, because it is a term that is common in the field of forex trading. Though I was told by an expert in forex trading that, sometimes you need to be very careful with this term. It has led to many people failing in life. This is because they never enquired the meaning of risking.

33

This is true, Risk off assets like US dollar and gold are considered to safe haven assets during downturn and financial crises.

34

Thank you for this information, it is very usefull.

35

Totally, it depends on the market situation. You can invest in risk off assets when a certain event or activity is about to take place which can boost the riskier asstes

36

How to manage risk when we place order trading?

37

I enter all my trades by orders, not live buys/sells.

When you identify the price at which you need to enter, also identify where your stop-loss should be using the price chart. Typically, this should be where price becomes more likely to continue in the opposite direction to your trade, for example below historical support if you planned on opening a long position.

Then adjust the size of your order using the distance between the entry and the stop-loss price levels. for example if you wish to risk only 1% of your account and your account has £1000 in it, your maximum risk would be £10: if the entry to stop-loss distance is 10 pips (allowing for the spread), then your risk per pip can be no greater than £1 per pip.

Then confirm your order.

1 Like
38

According to risk-on risk-off theory, price behavior is driven by and responds to changes in the investor risk tolerance. Thus risk-on risk-off in investment setting refers to changes in investment activity in response to global economic patterns. When the risk is low, the investors tend to engage in higher-risk investments during this period. When the risk is high, investors tend to gravitate more towards lower-risk investments.