This article is originally referred from iForex Blog.
You might have heard the concept ‘Risk-on risk-off‘. Today, we will try and explain exactly what it means (without overburdening you with unnecessary terms), and will show you how this term is relevant to online traders.
Simply put, Risk-on risk-off is an economic theory which explains market changes as driven by investors’ tolerance to risk. According to the theory, when risk is seen as relatively low, investors are more likely to prefer high-risk investments. When risk is viewed as high, investors (again – according to the theory) are likely to prefer lower-risk investments.
The theory relies on market sentiment, explaining that a more ‘optimistic’ view regarding global economy makes investors more willing to take risks for potentially higher returns. Investors’ willingness to choose riskier investments is expected to fall and rise over time.
What causes a risk-on or a risk-off situation? Risk-on can be caused by combined factors such as optimistic market outlook, rising corporate earnings and specific central bank policies. Risk-off can be caused by economic data that suggested a slow-down, lower corporate earnings, uncertain central bank policies, and several other factors.
Want an example for a clearly risk-off year? Just take a look at the 2008 financial crisis.
But what do “riskier” investments mean? Well, not all instrument groups are viewed as having the same risk. For example, stocks are historically viewed by some people as riskier assets comparing to, let’s say, gold. So, during risk-on times, shares tend to perform well, while in risk-off time, gold, at least according to this theory, is expected to perform well.
Is this theory completely accurate? Of course not, or else it would have been a fact, not a theory. However, such financial theory are if use to traders when trying to understand and evaluate market changes. For more information about various theories and how you can use them, visit the iFOREX Education Center and take advantage of the many informative resources we offer.
Original Source: iForex Blog