Risk on/off as an indicator | Forex Factory

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Risk on/off as an indicator

  • #1
  • First Post: Feb 20, 2016 10:27am Feb 20, 2016 10:27am
What is risk on / risk off? Risk on is when money is being put to work in risky investments, and risk off iis when risky investments are being closed and people going back into cash! Risk on is greed! Risk off is FEAR!
How to spot it:
Genearlly risk off.. Stocks are droping, gold may be popping as a safty trade, Jpy and euro may be going up. Lots of red on the stock traders screens!
Risk on stocks breaking key high levels... and just keep going and going!

How forex works... Some currency's have higher yield interest rates. They also pay a higher swap . They are higher because they have more risk!.
Aud usually has A higher interest rate because its tied in close to IRON ore and china.. Cad usually has higher interest rate because its tied to OIL.

Money flows into higher yielding currencies when there is risk on, can just be a slow grind up at times.
When you get risk off... Money is pulled often very fast as very sharp drops as margin calls are happening.
there is a saying, escalator up, elevator down.

How to use as an indicator.
You see stocks have broken key lows.. and look very heavy. You see people running to gold for safety. You see bond yields are flying.. All indicators you got risk off!
Trades you may look to enter in risk off.. E/A long, aud short, nzd short. euro long. jpy long.

Same goes if you see stocks flying, and have broken key levels to the up side.. Sometimes bears will just die and market can float up for days.
You may want to look for aud and nzd longs. e/a shorts and other currencies that do well in risk on..

Generlly during risk on you want to be buying the higher yeild currency. so you get a positive daily swap payments.
In risk off you want to sell currency high yeild.. and buy the low yeild as traders are looking for safty, not yeild.

Things can change over time.. But right now euro has been going up in risk off. As DAX drops.. People are exiting Stock positions and running back into EURO's.
So take note of how pairs are acting based on RISK on/off in the recent past... and capitalize on it in the future. Using it as a bias.

Remember never chase.. wait for market to pull back to a level you feel comfortable with.. then make some pips!

Risk on/off should be used as a bias. Trading is not easy and never black and white. And risk on/off can change though out the day. Asia may be risk off, europe may be risk on, and usa may be risk off again.. so choose your trades carfully and realize things can change quickly especally at data or when a new market session opens.!

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The only system that will work is one designed by and for yourself.
  • #2
  • Feb 20, 2016 11:14am Feb 20, 2016 11:14am
Thanks for explanations. I have a question - how does those observations have a predicting power. When there is risk off, how do you know that it is not turning risk on by the moment you make your observations, then decisions and the act on them - enter positions? And vice versa?
  • #3
  • Feb 20, 2016 12:41pm Feb 20, 2016 12:41pm
Quoting feline207
Thanks for explanations. I have a question - how does those observations have a predicting power. When there is risk off, how do you know that it is not turning risk on by the moment you make your observations, then decisions and the act on them - enter positions? And vice versa?
Fear and greed are powerful..
Fear = risk off Greed = risk on. Usually market will not be filled with fear, then flip and instantly filled with greed.. These things take time to change... Or a big news event to change them. So when you see extreeme Fear or greed... Best not to fight it.. rather join in on a bull back...

If some new peice of data comes out.. and you see a shift in risk on/off then its time to rethink and possibly reverse course.

This is not a system... Just a clue for a bias.

Other things within your system will determine your entry and exits.
The only system that will work is one designed by and for yourself.
  • #4
  • Feb 20, 2016 2:06pm Feb 20, 2016 2:06pm
Quoting feline207
Thanks for explanations. I have a question - how does those observations have a predicting power. When there is risk off, how do you know that it is not turning risk on by the moment you make your observations, then decisions and the act on them - enter positions? And vice versa?
Feline, track WHAT is driving risk on/off trade to give you an idea of how long sentiment could last for.
Simply monitoring major asset/instrument prices are only a confirmation of flows from yield out and out back in.
For example if the president was shot that would drive risk off trade and flight to safety and quality.

In simple terms find the EXCUSE for either risk on or risk off flows. Sometimes it can be obvious and other times more subtle.
At this present point in time for example, it may take a stabilization in China and a rebound in oil prices for the market to feel confident enough to chase yield.
Elevated CDS pricing, EM defaults, sagging oil and base commodity prices , low global growth, lack of inflation etc you can see how much resistance there is in general to flows into yield.
Plenty of issues there for 'money' to be concerned over!
  • #5
  • Feb 20, 2016 6:50pm Feb 20, 2016 6:50pm
Price moves, no matter what.
Nobody gives a s**** about risk on/off.
Make money and be happy.
  • #6
  • Feb 21, 2016 5:50am Feb 21, 2016 5:50am
Thanks for starting this thread, i have been studying FA for a while now and the hardest thing for me at the moment is knowing as fast as possible when sentiment is changing.

There is also not very much written about on educational websites, by searching about the subject and putting it in context when its written about on news sites like forexlive etc. i basically figured out what you explained on your first post.
Nevertheless its great to see you say the same thing confirming that i am on the right track.

Last week i signed up for the talking-forex service which is similar to ransquawk but much cheaper. I have found that this service makes it much easier for me to keep up with sentiment.

Which routine and information sources do you use to keep up with sentiment? Do you have some tips on how i can spot potential sentiment changers so i will be ready for them when they occur? I understand that its kind of hard to explain and that it's probably something you have to get a feel for by following the news flow for a few months and seeing the reaction it causes.

At this time my day job working in shifts (from 6am till 2pm and 2pm till 10pm) makes it hard to keep in tune with the markets. There will maybe become a chance that i can start working only in the weekends 12 hours a day while being free the whole week and still earn the same income.

This will give me the chance for concentrating fully on the markets on weekdays , it would be great to have a sufficient understanding of the markets by that time.

Regards,
Nik
  • #7
  • Feb 21, 2016 11:25am Feb 21, 2016 11:25am
Quoting bloodpoodle
How forex works... Some currency's have higher yield interest rates. They also pay a higher swap . They are higher because they have more risk!. Aud usually has A higher interest rate because its tied in close to IRON ore and china..
Wrong. Interest rates are not higher due to risk, they are higher due to central bank policy. The higher interest rate has ZERO to do with Iron or China.

Quoting bloodpoodle
What is risk on / risk off? Risk on is when money is being put to work in risky investments, and risk off iis when risky investments are being closed and people going back into cash! Risk on is greed! Risk off is FEAR! How to spot it: Genearlly risk off.. Stocks are droping, gold may be popping as a safty trade, Jpy and euro may be going up. Lots of red on the stock traders screens! Risk on stocks breaking key high levels... and just keep going and going!
Although I agree with what you are saying you have to understand the bigger picture. This week for example we have had a strong rally across the equity indexes, yet the Yen has also strengthened overall on the week closing up against all the majors. Therefore the Yen has actually had a direct correlation with equities, not inverse. Gold is also acting strange lately and has been quite difficult to identify whats driving it but its recent move is certainly very interesting.

For many years now the Yen has been the funding currency for risk. This means the counter parties are by default on the risk side of the equation. In other words, they are borrowing Yen to take risk, in most cases, a lot of highly leveraged risk. What happened during the 2008 credit crisis is money flowed back into Japan when risk sold off. Why? Not because it's safe there. But because it's the safe leg of the risk trade. Everyone was highly leveraged in the carry trade. They were long carry in high risk countries. You can compare what happened in 2008 to being long in a stock with a high level of short interest and a small float. Eventually those shorts will be squeezed out due to being on the safe leg of the risk equation.

Something else worth noting is that generally stock markets are the last to crack not the currencies. So it is best to watch FX markets for clues as to what may happen next in stocks, think of it as the tail being wagged . Monitoring emerging market pairs such as the Mexican Peso or Turkish Lira can sometimes yield far better clues than heavily watched pairs. The Peso has been a great directional tell for risk assets in the past along with Copper. This is why I say that trying to learn to trade by watching a single instrument is likely to be a fruitless endeavor. You need to watch everything to gather as much information as to what will happen next.
  • #8
  • Feb 21, 2016 12:57pm Feb 21, 2016 12:57pm
Quoting Sitting duck
Thanks for starting this thread, i have been studying FA for a while now and the hardest thing for me at the moment is knowing as fast as possible when sentiment is changing. There is also not very much written about on educational websites, by searching about the subject and putting it in context when its written about on news sites like forexlive etc. i basically figured out what you explained on your first post. Nevertheless its great to see you say the same thing confirming that i am on the right track. Last week i signed up for the talking-forex...
Learning to read sentiment let alone trade on it is a lengthy task that should not be underestimated. IMHO since you are working full time Talking Forex will be of little use to you.

Since you are working you should start by reading every single issue of Financial Times and Economist everyday for the next few years along with Bloomberg "Markets" and "News" section. Buy back issues of the likes of financial newspapers(FT, WSJ) for prior Bull & Bear markets and read them cover to cover whilst observing longterm price charts. This will give you a feel for sentiment and popular opinions at the time. Seeing how sceptical people were during Bull Markets and optimistic during bear markets along with seeing the way that people traded them at the time.

Pay particular attention to sentiment at extreme/panic lows alongside the overwhelming optimism seen at market highs and analyse these against Price Action.
Watch every single market when it gets to a 52 week low and try to identify WHAT is the driving force behind it.

Once you have observed sentiment for a couple of years you might be ready to implement it in your trading but even thats not guaranteed.
  • #9
  • Feb 26, 2016 2:35am Feb 26, 2016 2:35am
Hi redbaron,

Thank you for your insights

Quote
Learning to read sentiment let alone trade on it is a lengthy task that should not be underestimated. IMHO since you are working full time Talking Forex will be of little use to you.

I work full time but not from 9 till 5. My working regime allows me to monitor the markets from london open till NY open every two weeks. In these moments a service like forex talk does seem to help.

Quote
Since you are working you should start by reading every single issue of Financial Times and Economist everyday for the next few years along with Bloomberg "Markets" and "News" section. Buy back issues of the likes of financial newspapers(FT, WSJ) for prior Bull & Bear markets and read them cover to cover whilst observing longterm price charts. This will give you a feel for sentiment and popular opinions at the time. Seeing how sceptical people were during Bull Markets and optimistic during bear markets along with seeing the way that people traded...

I am now reading all articles from http://www.babypips.com/blogs/piponomics and http://www.bkassetmanagement.com/fx-insights/ wich where recomended by FF members numbnuts.
I will start reading some stuff on your links too. I am afraid that reading all of it is going to be too time consuming.

Quote
Pay particular attention to sentiment at extreme/panic lows alongside the overwhelming optimism seen at market highs and analyse these against Price Action.
Watch every single market when it gets to a 52 week low and try to identify WHAT is the driving force behind it.

Are we still talking here about short term risk on risk off sentiment? Or are we talking longer term sentiment caused by underlying fundamentals?

Quote
Once you have observed sentiment for a couple of years you might be ready to implement it in your trading but even thats not guaranteed

I am planning on implementing it on a shorter timeframe then a few years, i dont underestimate it and i understand that its not learned overnight. Although within six months from now i would like to understand it well enough to start implementing it in my trading.

Regards,
Nik
  • #10
  • Feb 26, 2016 4:44am Feb 26, 2016 4:44am
I don't have much time so here is the best responses I can give.

Quoting Sitting duck
I work full time but not from 9 till 5. My working regime allows me to monitor the markets from london open till NY open every two weeks. In these moments a service like forex talk does seem to help.

The problem is by trying to read sentiment on an intra-day time frame you are not seeing the woods for the trees. At this stage of learning, listening to talking forex will be a fruitless endeavor. which will only seek confuse the hell out of you.

Quoting Sitting duck
I am now reading all articles from http://www.babypips.com/blogs/piponomics and http://www.bkassetmanagement.com/fx-insights/ wich where recomended by FF members numbnuts.
Quoting Sitting duck
I will start reading some stuff on your links too. I am afraid that reading all of it is going to be too time consuming.
In my opinion, reading information on those links will only take you down a path followed by 99% of FF members. You need to ensure that what you are learning about the market is 100% correct. Think about who are the authors writing those articles. Are these sources reliable? Are they real traders passing years of market knowledge? In fact go on to examine the business model behind these websites, more importantly how do they generate revenue? As I have stated in another thread, for me it was only when I unlearned what I had learned from paid sources and several forums that my profit started to increase. If numbnuts told you to read those sources then do you know if numbnuts is a reliable source?

Personally I would like to read books written by REAL traders. The Market Wizards series of books are a good start. If reading 100-500 books gives you an idea as to how to find a single edge, then it will be worth far more, than all the time effort and money wasted on unreliable sources. Please take this seriously from someone who been there and wasted a lot of money paying for fairytales about how you should trade.


Quoting Sitting duck
Are we still talking here about short term risk on risk off sentiment? Or are we talking longer term sentiment caused by underlying fundamentals? I am planning on implementing it on a shorter timeframe then a few years, i dont underestimate it and i understand that its not learned overnight. Although within six months from now i would like to understand it well enough to start implementing it in my trading.


Now here is the problem. Without truly understanding sentiment, you are already forming a plan as to how you are going to use it. This is most probably caused by threads you have been reading, where people are saying quotes like "Ok risk off today so I am, going short when they hunt the upside stops". Utter garbage along with the rest of this order flow nonsense - been there done that got the Tshirt.

Planning to trade on spurious information like this will lead to a very low hit rate and over a large enough sample size will most probably end up in you going bust.
Once you know how to read sentiment, there are times where dislocations occur between perceived value and price, these are what you need to look for. You see the market is constantly giving you information, but by imposing arbitrary logic like the above you will never really learn to listen. When you can listen to the market correctly finding edges becomes a lot more easier. You will also be trading from an edge that is impossible to back test and so the chances of it decaying by others replicating it will be very small.
  • #11
  • Last Post: Feb 26, 2016 11:09am Feb 26, 2016 11:09am
I know of an indicator that measures the strength of the market relative to the Sentiment Data from the Trading Deck in www.MarketWatch.com
Its not for mt4, I think ninja.
It takes the Advance's, Decliners, and no Change, and Plots them.
I don't think this provides an edge to trading; at least for me since I can tell what the sentiment is by simply looking at a chart.
Its the I changes that I am interested in.
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