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Manage A Trade Inline With Risk Tone Shifts
We have a couple of questions in the Q and A box on how to manage a trade, especially a risk sentiment trade, if the risks don’t starts to shift or become more unclear.
First of all, thanks for the questions guys.
So the question is basically assuming that we have entered into a trade, during a strong risk-on or a risk-off sentiment, but in the meantime that sentiment has turned more unclear and how should we manage that trade accordingly.
RECOMMENDED READING: FURTHER HELP TO MANAGE A TRADE INLINE WITH RISK TONE
So, the reason for shifting, for the shifting in the risk tone, is the very first and most important consideration we need to keep in mind. So if a news event or an announcement has caused the tone to shift away from strong risk-on or risk-off, and has become more mixed, that is usually a good spot to rather close out a trade, as the actual reason for entering the trade has changed.
So there is no longer a strong risk-on or risk-off drive due to a event that happened in the meantime.
However, if nothing has happened to cause that shift in the tone, then it might just be a normal pullback. And you can choose to simply reduce your risk on that trade, in case the tone continues to moderate and eventually flip over. Now there’s also a big difference here between day trades and swing trades. So if you’re trading risk sentiment as a day trade, that is not something that you would want to keep open overnight usually.
So if you trade a risk-off sentiment yesterday, you will want to close that trade when the session or the day ends, and not really hold onto it overnight as risk sentiment can change instantly and be rather fickle. Especially in low, thin liquidity environments like the Asia taxation.
Now having said that, if the reason for the risk zone is something extraordinary, like a war or something that sends the whole market into a major panic, that is more sustainable. And that is something that you can trade and hold for a couple of sessions, but it needs to be something very significant and that has a sustainability to really affect the markets for a couple of sessions to really hold that with a lot of conviction.
Now when it comes to swing trades, if you are trading a medium term risk tone, then you can simply just reduce your risk on that particular trade and minimize your exposure if the risks tone suddenly changes more positive, or negative depending on when you entered.
Something just to keep in mind for swing trading or medium term trading is trading risk sentiment from a swing trading perspective, can be a lot more tricky than trading it as a day trade sentiment. Because a lot can happen in the short term that affects the markets tones.
So you can have unexpected events that causes the markets to either be more positive or more negative. And if it’s a short term squeeze, in terms of a sentiment shift, that can really see lots of unwinding of risk-on risk-off flows, if that sentiment suddenly changes. So it can be more tricky on swing trades.
The best case, the best thing to do in that case is just to simply reduce your risk and minimize your exposure on that particular trade. And then to keep in mind that if the reason for your medium term swing trade position, if the reason for that has changed with the short term sentiment change, then that is also a good spot to just liquidate that position and not keep on holding it.
So the reason is always going to be very important. So I hope that helps guys, if there’s any other questions with regards to this, just let us know.