Traders certainly cannot predict price movements in the financial markets. What traders see on the chart is a reflection of Supply and Demand involving market participants in it, that is Buyers and Sellers. There are times when the market is in a risk-on or risk-off situation. For traders or investors, understanding these two situations is very important.
If market conditions are risk-on, the risk-on trading strategy on high-risk assets will certainly be more profitable, and vice versa. The main goal is that you can understand changing conditions and find the best momentum to enter the market. The more precise the momentum and method, the more profit you generate.
What are Risk-On and Risk-Off?
Basically, the two terms describe mood or sentiment of market participants in the current economic situation. This is what underlies the actions of investors who massively sell or buy in the market and push prices to move in a certain direction. According to Investopedia, risk-on risk-off is an investment paradigm under which asset prices are dictated by changes in investors’ risk tolerance.
Risk-on condition illustrates that market players are optimistic about the prospect of an improving economic condition. Thus, traders or investors tend to shift their capital to financial instruments that provide high returns. Risk-on trading action will create positive sentiments with high-risk interest. As a result, the price of related trading instruments will strengthen even more.
Conversely, in risk-off market conditions, market participants tend to be pessimistic about the current worsening economic conditions. This makes investors tend to withdraw their capital from risky instruments and move to more stable assets. This risk-off trading action will create negative sentiment in the market. Thus, the price of trading instruments with high risk will usually fall or get weaker. Meanwhile, assets that are considered to be a safe-haven will strengthen.
