Risk on / Risk off

[bigdolly]

Can somebody help describe the difference between the two?

Risk is a measurable uncertainty of future asset returns. When this uncertainty decreases (often thanks to new economic data releases), assets that offer high expected returns due to higher risk, should obviously be undervalued. Assets that offer lower expected returns, on the contrary, should be valued less. When such a view is true for an average market investor, overall market's behaviour is described as "risk-on".

 

[decruzdamian]

i think it refers to the level of risk you wish to bear

 

[ForexTus]

It relates to risk tolerance of investors. So in high risk times like an economic crash or the recent covid outbreak investors might choose to move investments into less volatile instruments such as bonds and cash. As the situation improves we might see a return to risk on where investors delve more into the stock market, high yield bonds, commodities, or even the crypto market. Within forex risk off tends to lead to safehaven currencies like the USD, CHF and JPY being bullish and during risk off we might see them become more bearish as money moves into other currencies.

Was going to post but this sums it up perfectly

 

[Vivaan Jua]

A risk-on environment describes when investors are willing to invest in higher-risk securities. They feel that corporate profits, economic outlook, accommodative central bank policies and other factors have created a positive environment for investors. While there is always an inherent risk in stock market investing, risk-on investing indicates that investors feel that there is less risk in the market. Risk-off scenarios typically happen during a recession, when stock market volatility increases or when war or terrorist attacks happen. Investors shift their portfolios into a “defensive” position and buy these types of investments in their portfolios: bonds, utility stocks and others.

Perfectly said! Actually, during the risk on sessions, usually I reduce my trading lot size, since the market behaves like more unpredictable, and I get less success ratios during the risk on time!

 

[sebking1986]

I tend to find that moves are more powerful when it's risk on which I don't mind as it either stops me out quicker or I hit TP quicker. Either way means less market exposure.

 

[bigdolly]

I tend to find that moves are more powerful when it's risk on which I don't mind as it either stops me out quicker or I hit TP quicker. Either way means less market exposure.

Well it's well-known fact that market is up by stairs and down by elevator. that's why on liquid instruments you should expect larger moves during drawdowns, i.e. periods of risk-off.

 

[FriendlyFX]

Well it's well-known fact that market is up by stairs and down by elevator. that's why on liquid instruments you should expect larger moves during drawdowns, i.e. periods of risk-off.

You mean that simply bearish Markets are happening quicker and bull phases are slower more prolonged?

 

[bigdolly]

Can somebody help describe the difference between the two?

It's just a notion describing market preferences towards asset risk in a particular period of time. For example when it is said that market is in state of risk-on then assets like equities, commodities, junk credit and other assets with high degree of uncertainty in their return tend to outperform assets like Gold, Japanese Yen, risk-free bonds like Treasuries etc. When market is in state of risk-off then vice versa - gold and bond show higher returns that equities

 

[JimmyRozza]

Great explanations, I am getting it now. Is there any website or indicator which can display the current market sentiment in terms of risk on / risk off anywhere?

 

[bigdolly]

Great explanations, I am getting it now. Is there any website or indicator which can display the current market sentiment in terms of risk on / risk off anywhere?

Yes you can check myfxbook sentiment, however retail trading sentiment is useless it doesn't indicate bias of interbank market trading participants which decisions basically set market direction.