What is the concept of risk-on and risk-off in commodities?

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Traders should have complete knowledge about the segment in which they are trading. Being a trader you have likely heard the terms “risk-on” and “risk-off”, if you watch the financial news or read business periodicals and research about various asset markets. Commodity tips are preferred by traders to know about the market performance. Traders and investors around the world understand that a risk-on or risk-off event can have significant consequences for the prices of stocks, bonds, currencies, commodities, and all other market vehicles that move up and down in price.

Risk-On

The quest of all market participants is to increase the amount of available capital at their disposal, when the markets are operating under normal conditions. Individual traders, investors and money managers will buy or sell assets to capitalize on market volatility or price movement. Fundamental and technical analysis will be used by these market participants to determine whether they believe the price of an asset will appreciate or depreciate. Then they will enter the market to either buy or sell. At times, traders will identify mispricing or spread trades where they purchase one asset and sell another.

Leveraged derivative instruments like futures, options on futures and other vehicles to magnify returns attracted many market participants to maximize the return. Greater risk is contained by the leveraged products but offer the potential for greater rewards.

During the period of risk-on, the leverage tends to increase in the market as the majority of professionals and individual investors view the possibility of market and external risk as low.

Risk-Off

Many time due to some market-related or external events the market will move dramatically in one direction or the other because of either . This period is termed as black swan event by some traders. Statistical tools are being employed by many traders that measure the sensitivity of investment portfolios to market volatility. One of these tools is VAR or value at risk which became popular since the 1990’s. This tool provide insight into the performance of a portfolio during extreme periods or black swan events. Hence, it is being used by banks, financial institutions like hedge and mutual funds. Profits and losses for a portfolio based on a market move of multiple standard deviations is tested by VAR.

This statistical metric is a measure of price dispersion from the mean or average price. Data points are further away from the average and in markets with less variance in volatile markets or they are closer to the mean. The one main cause of the markets to move 10 standard deviations or more in a very short time is black swan event.

Traders should know about the market statistics and various terms related to market. Before entering into the market one should be aware of the consequences and benefits, one can get from the market. A good stock market advisory plays a vital role in a traders life. They can get all the updates about market and good investment ideas.

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