We’ll be explaining how risk on / off sentiment is another way of describing the current mood that the market is in. We’ll also be showing you how to identify those moods and trade them correctly.
OK, so when the market is said to be RISK ON it actually just means that traders are in a positive mood. They’re feeling optimistic and are prepared to take some risk in order to make more money. This means they will buy assets that give them a higher yield. Things like, stocks and shares and high beta currencies like the New Zealand Dollar or the British Pound.
Currencies with a higher interest rate attached to them are the most attractive targets for traders and investors. Naturally, during these positive RISK ON periods, those assets tend to rise in value.
If you’re trading, and you notice that the market is RISK ON, you should be buying the major currencies that have the highest interest rate at the time. When the market is said to be RISK OFF then the opposite is true. It means that the market is in a very negative mood. They’re feeling depressed and worried. This means they will sell all of their risky assets in favour of low risk, safe haven assets.
A safe haven doesn’t give much yield but it doesn’t fall in value too much either. It’s a great place to store your money in the short term until the market panic blows over. Safe haven assets include things like Gold, Government bonds and traditionally low risk currencies such as Japanese Yen or the Swiss Franc.
During normal RISK OFF circumstances, the Japanese Yen is the most reliable currency to buy and hold. All this buying naturally makes the price rise, which can lead to some great trades if you can react in time. And that’s what risk on and risk off means.
If you notice the market is RISK ON focus on buying the major currencies with the highest interest rates attached to them. If you notice the market is RISK OFF, focus on buying the Japanese Yen instead. It’s also a great idea to pair the currencies intelligently too. So, if you’re buying a safe haven currency, pair it against a high yielding one, and vice versa.
This will give you the optimal trades and the best chance of catching the biggest moves.