Understanding Risk Sentiment is Key for Trading Strategy Development
- Risk sentiment is a key starting point for trading strategies
- Fed QE has fostered artificially low about risk aversion
- Market volatility creates demand for safe haven securities
Each investor must decide his or her appetite for risk before implementing any trading strategy. In times of low risk appetite, traders will buy securities with a high expected return. The opposite occurs in a state of risk aversion. In times of high uncertainty, “safe haven” securities will be in demand regardless of their expected return. Traders are more concerned with protecting their money than generating a profit. Since the onset of QE by the Fed, the general sentiment has favored “greed”, the buying of risky assets with little concern to risk.
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