wtf is risk appetite and how does affect FX

I have been checking out dailyfx for awhile now, in the commentary, the term risk appetite is often used to correlate the wellbeing of different currencies.

What exactly is risk appetite and how does this affect the different currency such as the EUR/USD pair?

Risk Appetite is the of amount risk or the potential bad impact someone is willing to take / accept...

thanks for the reply, but this part is something i do know, but how is this related to FX? if risk appetite decrease, and aversion goes up, do people buy the usd or euro or something? safe haven etc concepts or w/e?

This video answered some of my questions as Henry Liu talks about risk appetite, risk aversion scenario as he describes one tool he use for trading:
http://www.newsprofiteer.com/newsprofiteer-meter.html
Hope it helps.

Constin

im not so sure about that video I would try wikipedia

buying or selling in FX you are either accumulating risk or shedding risk
risk app would be a hunger for risk
risk aversion would be the feeling to liquidate risk
unless u are holding a position already there is no aversion only appetite as either way buying or selling your accumulating risk until you shed it.

if your a portfolio minded person your always carrying risk whether its cash or watever so your liquidating of risk in equities would be risk aversion and your risk appetite is now for cash.

anyways it depends on how you look at it.

for example youll hear stocks are seeing risk aversion while riskless securities are seeing higher appetites.

Risk appetite is essentially how much risk an entity is willing to take.

For forex the logic is simple.

The US Dollar is considered the safest currency (I personally don't think it is anymore), and because the world considers it safe, when there is a economic down turn, many investors are going to put their money in the dollar.

Once that happens the demand for the dollar goes up and you can probably get the rest from there.

A perfect example is if you go back to July - August of 2008, the Euro tanked vs. the dollar. It wasn't because the US Economy was doing any better, but because everybody in the world started doing terribly, so everybody in the world went for the safe dollar.

Thats risk appetite in a nutshell.

Another effect of the risk appetite variable concerns the carry trade. When investors are looking for higher returns (and thus have a higher appetite for risk), they tend to borrow lower yielding assets for exchange into higher yielding ones. For example, note the rise in AUD/JPY since the beginning of the year. As the recovery commences and investors are ready for more risk, they're moving back into that carry position. I've recently doubled a carry position in the Turkish Lira.

Don't read this crap at all, or at least turn on filter like 100:1

same goes for CNBC.

I got caught ones, when like 7 month ago, I read commentaries of

IBFX that:

'Goldman "Sucks" taking of short bets as US Dollar has been bottomed out..' Right

That was around $1.45/Euro.

I got burned only twice when

#1

I listen that IBFX commentary and cut losses

and

#2

I read forum for Cable traders, when they were screaming Cable

will go down to like 1.53, While I build huge long position around $1.57-$1.58

I switch to long and next few days Cable rallied to $1.63..

Conclusion? Don't rely on anybodies BS and I mean Anybodies, either Goldman "Sucks" or

other members on this forum - stick to your own plan, that's all.

Most of their (Biz. News Channels) crap it's just daily brainwash BS, which switching from one side to

the other as fast as 5M TF Chart.

Good luck.

And you right "Not Anymore". Watch last week data, last Sunday,

when Dubai Fin. Default rumor brakes out.. Take a look at Japanese

YEN, that a "Safe Currency" right now, but this is just same as crazy,

cause there is no Safe place in FIAT, - it's just a paper..

Besides Japan has much worse situation with Debt then USA...

Who else has huge Debt?

German? You bet.. England? Of course. India? Ohh yeah..

Well, show must go on.....

When we talk about safe haven currencies, we must understand that as of now, it is all tied down on its interest rate. As of now, Yen and the dollar has the lowest rates, in which during a market turmoil, traders will opt for these currencies. As of now, safe heaven currencies are currencies of low yield. Take note that by studying the correlation currencies, commodities, indices etc, we can identify whether it is still applicable or not. It may change but we can be aware of it.

The term risk aversion is always related to "fear" and global economic uncertainty. When there is "fear", investors / traders will not get into risky assets such as high yield currencies (Euro, GBP), commodities, stocks for fear that it may dwindle in times of market turmoil. So they opt for low risk assets (safe haven currencies, bonds).

The term risk appetite is related to "greed" and positive global economy. During such times, stocks, commodities, high yield currencies are favoured.

We can look at it this way, when the economy is good (or recovering), people tend to get into risky assets thus what we term as risk appetite. Risk aversion is the opposite.

There is still a lot to be explained in detail but this should give you a general understanding.

The pic gives a general correllation of the market for the past year. At that time, dollar strengthens when US data is bad. But the opposite might take place anytime soon.

Btw, i don't trade solely on FA. In fact, I'm a fibonacci freak . But since I'm trading fulltime, it doesn't hurt understanding it in detail. It helps one way or another.

Very nice presentation.

Thank you,

Constin

thanks for all the replies I have a better understanding of risk appetite now.

hmm, how exactly do you use fib to your trading other than the average drawing retracement and extensions?