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How To Trade Risk Tone
We just had a question from Caric and Mark, asking us how we should trade during days when we have a mixed risk tone like today?
So first of all guys thank you for the great question, the first thing to remember about risk sentiment is that risk sentiment is basically just one facet of short term fundamentals.
RECOMMENDED READING: HOW TO TRADE RISK TONE
So, the type of things that can drive markets in the short term’s risk sentiment is obviously one of the main drivers, but markets can also be focused on geopolitical events, it can also be focused on economic data, it can also be focused on monetary policy, et cetera. So there are many different drivers that can drive the market in the short term, risk sentiment is jus one of them.
Now even though risk sentiment is always important, there might be times when the market might be paying less and more attention to it depending on the current drivers that the market is focused on. For example during the hype of the trade war negotiations between the US and China, we saw risk sentiment take center stage for quite sometime, just like we have with this pandemic, but eventually it basically mattered less and less when the markets turned their attention elsewhere to other more pressing or short term matters.
Right now what we seeing with the corona virus that is basically pushing the world into a recession, so there’s a lot of focus right now on risk sentiment once again with the question being asked, how long will this recession last? How deep will it go?
So any type of factors that pushes the pendulum either into a more deeper recession or a lighter one will basically cause risk flows and that will be the main focus that the markets currently focused on.
Now, that doesn’t mean that something like economic data for example isn’t important, it just means that right now it’s not really a big focus for the markets, so coming back to the question, if there is not current risk or clear risk sentiment in the market the first thing we need to consider is, are there any other sentiment drivers right now? Major drivers for the currency?
So maybe they might be short term or medium term factors that the markets will be focused on for other currencies that are less sensitive to risk tones.
Now in times like today, when there are no short term drivers for either risk sentiments or other short term drivers you could consider maybe looking at the more macro elements, the more longer term fundamentals for some opportunities but even then we would ideally want the market to have a short term reason for buying or selling in line with that bigger picture, that macro fundamental bias.
When there is no clear sentiment whether that is risk sentiment or otherwise, the very best thing that we can do is basically just stay out of the market, until a very clear tradable and sustainable catalyst and driver emerges.
It’s usually during these times or days like today that the market will chop around and basically chop traders up as it rip-soars without any clear direction the smallest thing can cause it to go up and the smallest thing can cause it to go down.
Which basically means it’s best to stay patient, stay out of the market and wait for a very clear driver before we enter and re-engage.