 Hi, my name's Leon Rowe currency trader and trading coach at trading 180.com and in this video I'm going to be talking about understanding risk sentiment, you know risk on and risk off, you know, what is it and the environments and the triggers really of risk on and risk off and you really as a trader have to be aware of when an environment is more risk on or more risk off because really money flows into and out of certain asset classes depending on What environment we are in so first of all, what is risk on and risk off and according to investopedia? Risk sentiment right which is risk environment as well. It can be interchanged It says what asset prices ultimately detail the risk sentiment of the market? Investors can often find signs of changing sentiment through corporate earnings macroeconomic data Global central bank action and statements and other factors. So risk on environments Yeah, I you are sorry are often carried by a combination of expanding corporate earnings optimistic economic outlook accommodative central bank policies and speculation we can also assume that an increase in the stock market is a sign that risk is on as Investors feel the market is being supported by strong influential fundamentals They perceive less risk about the market and its outlook conversely risk off Environments can be caused by widespread corporate earning downgrades contracting or slowing economic data uncertain central bank policy a rush to safe havens and other factors just like the stock market rises relating to a risk on environment a drop in the stock market equals a risk off environment that's because investors want to avoid risk and are averse to it so risk on Is when traders want to put more risk on the table? Yeah, and risk off is when traders want to put you know take risk off the table depending on certain environments, right and so When Thinking about risk on and risk off. It's not necessarily a binary State, it's not either risk on or risk off Think about risk on and off as more as a scale So a scale would be something like maybe one to five or you might have a bit of a neutral so you might have more Dream ends yeah where this and here is more of your or the middle is more of a neutral right bias and You have for example, that might be zero story that I think about it Yeah, and let's say for example, that is extreme off and that might be something like, you know make ten Right, that might be random ten here extreme off and this would be for example extreme one, right? so This is off And this is on now depending on the actual environment and what is causing the Risk on or risk off for what the what event is triggering Will depend on how much I guess the market sees The extreme of the risk off now I guess to compare or to an in recent history The most recent extreme risk off event. Yeah, it would be something like covid that would be an absolute extreme ten Yeah, the Russia Ukraine war would be something that would be very similar to the To to covid as it did it has affected various regions of the world not just Russia and Ukraine But all the surrounding countries even you know in Europe and even the US and the UK right And risk on would be more of a favorable environment when there's really no risk events or everything is pretty much Hunky-dory, right as you say, so Whenever we're comparing new risk events best thing to do is to think about the most extreme risk off event and compare, you know the Risk event that is happening to the most extreme events most extreme events would be for example Well, our major risk off events would be again covid locked down something like the Ukraine war Recently we've had the SVB and other I think silver bank bank and the fear was collapse such to say and the fear was that the the banking sector Collapse may have been systemic similar to what happened in 2008 so 2008 was a Would be a very extreme Risk event something like brexit for example was quite extreme as it affected not only the UK But trading relationships, you know around the world in Europe right and so again as I say compare If you're looking at You know the degree of risk off and where are we it is? You know quite subjective, but if you kind of compare it to the most extreme Risk off events that you've had in recent history or over the last, you know, 10 15 years is the current Risk off event that we may be experiencing in the financial markets Is it comparable to the most, you know extreme event? And if it isn't then you can kind of place it maybe four five sixes etc around there Or maybe what just one twos and threes right? It could be somewhere around there again It is it can be a bit subjective, but at least it gives you a rough idea as to how extreme it might be And one of the things that we have to be aware of is, you know, the papers sensationalizing risk events But always know that risk events no matter how bad they get will always be priced in meaning that the market will eventually reach evaluation as to you know what the the effect on the risk event will have on asset prices, so think about for example The recent Russia-Ukraine war right now when it first started in around February March times Last year. This is the dollar Russian ruble. We had the Russian rule will absolutely Devalue against major currencies like the dollar but eventually that was The event was eventually priced in in terms of how bad was The Ukraine war on the Russian ruble, right? There are many different factors, but ultimately The risk event gets gets priced in if you go to and if we go to somewhere like the something like the Let's say we go to was again or any currency and we go back to 2020 we look at the risk-off Event which was COVID eventually it got priced in To the point where The market started to forward think and this is what the market does the market thinks forward and into the future and thinks okay, this risk event will it last forever or how long will it last and What are the future valuations if it doesn't last or if we come to some sort of conclusion and So as bad as risk events tend to be they typically a get priced in and then be what then gets priced in is I guess the solution right and moving forward and how we move forward as Either a country or you know as a as a as as the world, right and our ability to Overcome certain issues and problems. For example, you know, is there you know peace in the world, etc. Etc. So You know that is really It's really important to understand that that Risk of sentiment. Yeah can drive prices to actually where you want to be a buyer Because once the dust settles, yeah, once the risk of dust settles Eventually what will happen is is that investors will start to then Look for bargains, right? They will accept the fact that price for this, you know asset in a risk-off environment is this but what happens when in fact risk becomes more on That asset then starts to become or look like an actual bargain and then buying You know typically tends to happen and again going back to the chart That's really what happened with the Australian dollar. Typically the The Japanese yen is seen as a risk-off currency And we were still in the grips of covid even into May June July by the end of the year But what was driving the Australian dollar higher against the Japanese yen, which typically shouldn't happen Was several factors. So one of them was an impending vaccine right that was You know a resolution to Covid also as well the fact that Australia handled the Covid lockdown better than most countries and they were seen as actually Growing first one of the countries that would probably end up growing first In terms of GDP Whereas a lot of other countries didn't handle the Covid lockdown very well Japan being one of them and so the market was more forward-thinking even though Covid and fear of Covid and Covid spreading and different variants were coming out The market was forward-thinking in looking at solutions and resolutions and comparing the Australian economy to the Japanese economy all right, which wasn't doing too well and so again going back to Understanding that risks of risk-off events would eventually be priced in and also it gives investors an opportunity to actually buy Undervalued assets, whether it's stocks, whether it's exchange rates, etc Now how to know when the risk-off or risk-on Sentiment Sorry, let me just read that again. So how to know when risk is off or on and to what degree right and that's really the key question and It will take some time for you to an experience for you to really kind of get a grip on it And even then it's very it's quite hard to do But you know your best educated guess is that you want to look towards Publications like Bloomberg or the Financial Times or Reuters and actually look at the front pages Why the headlines and so you know today is Monday the 3rd of April and We look at the front page of the news and we have for example The recent news is OPEC makes shock million barrel cut in new inflation risk and inflation crisis pulls European countries into a food fight Putin's war may be reaching pivotal moment ECB wants of risk posed by One trillion real estate fund, etc, etc, right? But notice what we're not seeing on this front page, which is although, you know, the news is here to sell You know doom and gloom Certain times what we're not seeing is the recent risk Event crisis, which was the banking collapse, right? So You know in terms of, you know SVB Bank Being systemic, right? We've got other Issues going on and so when we had the SVB Bank bailout Deutsche Bank being bailed out by UBS, etc. And the issues those banking You know Giants had It would have been it would have looked The front page of Bloomberg was looking very, you know, one-sided in terms of there was just a one-way story Yeah, but now you have various different stories And so when you want to understand okay, well is one headline dominating the risk on a risk of sentiment and how severe it is look at the variety of The stories on the front page of any major news publication if it's more varied probably means that risk is Less off. I wouldn't say it's necessarily on because I think it's ever going to be a time where there's nothing to really kind of worry about Right again. Good news doesn't sell but to the varying degree of You know certain risk events If it's really kind of focused and concentrated on one story or maybe one or two stories Then you know that you're probably more in a risk-off Environment and at the market is really focused on that narrative rather than Okay, the varying degrees of stories from around the world. Yeah, that will probably mean less Risk-off. Yeah. So again, we you know draw as a scale understand it as a scale. Yeah where you have Varian degrees of risk on and risk off Like this being risk off this be probably more neutral if you have more Varied news on the front pages of you know publications like Bloomberg what is financial times? You're probably maybe somewhere towards risk of miss risk Probably more neutral right and again It depends on the quality and the actual incidences in the that are happening right but if you have one tend to have one Soul event that the market is focused on and also as well, you know You go to Bloomberg financial times and lawyers and they're all talking about the same things, right? Every every news publication is focused on this one news event then It's likely that you're probably looking at more of the extreme end of the risk off Scale yeah, and so that For me is how I also I Understand, you know where I am in a risk of sentiment also finally one of the things I didn't I didn't cover Sorry was price does not lead with sentiment and what I really wanted to say with that is that Many traders believe that if let's say, you know, we know that the stock market tends to rise in a risk On environment. Yes, so which means that? Investors are looking to take risks and put market and to get you know bigger returns, right? So When the stock market starts to rise That would mean risk risk on and if the market start to pull back then that would mean risk off then that would mean risk on then that would mean risk off and really you can't and you shouldn't Determine whether risk is on or off based on what price is doing because price can trend Right prices can pull back in a risk on environment and they do pull back in a risk on environment in the same way that if you have a risk off environment, yeah Prices can pull back Yeah, prices pull back for varying reasons for liquidity reasons people taking profit, you know, etc. So it's not, you know, one day on one day off one day on one day off because prices are going up and down You have to take your cues from actual actually reading the media I know there's going to be a lot of news a lot of a lot of noise Sometimes in the market, but this is a skill that you have to develop is to learn to filter through the noise As I said before previously understanding whether the narrative is on all Publications or is it actually now a situation where the narrative And news publications are not Focused on just one main news story and in fact they're focused on very in various news stories Also as well, of course, it can be more nuanced because the news stories could also definitely still affect the stock market and it also depends on the the news stories itself, but from a risk on and risk off and how extreme we are and a risk on and risk off environment, just know that you know, it's It's the narrative of a single narrative or many narratives also as well. It's important to Keep in mind that risk off will eventually be priced in it will eventually find its value in a risk-off environment and then eventually depending on obviously the risk The risk event You know the market will start to forward dink and start to say, okay Well, is this going to be a continuation? How long is this likely to last if it's not likely to last that long then they start to buy or sell Go long or go short on that narrative against actually risk off sentiment. All right guys Hope that helps take care and speak soon