Does Risk Sentiment Matter For Swing Trades?
Risk sentiment is always important, whether you are a day trader or a swing trader.
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We have a quick question from Alexander asking whether overall risk sentiment matters for medium or longer-term positions like swing trades or position trades, and if so, how can we best approach it compared to a shorter-term intraday approach?
Thanks for the great question Alexander. So, let's start with the question on whether risk sentiment affects markets in the medium-term, and the answer is that it certainly can.
We only need to look back at the devastation that risk off sentiment brought to the market in February and March when the threat of the Coronavirus started to get priced into the market.
Another good example is by looking at price moves of risk sensitive assets during the first part of the global financial crisis back in 08. We can see from these two examples that risk sentiment is an important consideration for the medium-term as well as the short-term.
But the question after this is when can we approach this in our trading, when can we know that it will have a longer and more sustainable impact compared to when it might just be something that impacts the markets for a few sessions?
And I think it comes back to the reason for the risk sentiment, whether it’s part of a key macro theme in the markets or whether it’s part of a lesser important idiosyncratic driver. Also keep in mind that even if something is part of an overall important macro theme, it will affect every asset class differently depending on the individual drivers for those assets.
For example, looking at something like the AUDUSD during 2018 and 2019 the currency pair suffered quite a lot of setback, and even though a big part of this was Dollar strength, the ongoing US/China trade war saw lots of downside for the AUD which is very dependent on China for trade.
Now compared the moves in the S&P500 during 2018 and during 2019 with the moves we saw in the AUDUSD, remember that the AUD is seen as a proxy for risk sentiment, which means that it is expected to usually follow overall moves in equities, but that wasn’t the case back in 2018 and 2019, because even though the trade war saw some short-term jitters for equities, there were other drivers that kept stocks supported even though the AUD went through lots of downside.
Among other things, the Dollar saw massive upside as the US economy outperformed the rest of the world, and while the FED was busy hiking interest rates other central banks around the world were entering easing cycles as their economies were starting to slow.
So, like with most things in trading it’s never just one thing, it’s always a combination of factors that we need to keep in mind, and when it comes to risk sentiment and how it relates to swing or position trading it really comes down to the specific assets that we are trading and what the fundamentals are showing for the medium-term and longer-term for that particular asset, including things like monetary policy, fiscal policy, geopolitics, intermarket analysis etc.
So, hope that helps with the question Alexander, any other questions please don’t hesitate to let us know.
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
We have a quick question from Alexander asking whether overall risk sentiment matters for medium or longer-term positions like swing trades or position trades, and if so, how can we best approach it compared to a shorter-term intraday approach?
Thanks for the great question Alexander. So, let's start with the question on whether risk sentiment affects markets in the medium-term, and the answer is that it certainly can.
We only need to look back at the devastation that risk off sentiment brought to the market in February and March when the threat of the Coronavirus started to get priced into the market.
Another good example is by looking at price moves of risk sensitive assets during the first part of the global financial crisis back in 08. We can see from these two examples that risk sentiment is an important consideration for the medium-term as well as the short-term.
But the question after this is when can we approach this in our trading, when can we know that it will have a longer and more sustainable impact compared to when it might just be something that impacts the markets for a few sessions?
And I think it comes back to the reason for the risk sentiment, whether it’s part of a key macro theme in the markets or whether it’s part of a lesser important idiosyncratic driver. Also keep in mind that even if something is part of an overall important macro theme, it will affect every asset class differently depending on the individual drivers for those assets.
For example, looking at something like the AUDUSD during 2018 and 2019 the currency pair suffered quite a lot of setback, and even though a big part of this was Dollar strength, the ongoing US/China trade war saw lots of downside for the AUD which is very dependent on China for trade.
Now compared the moves in the S&P500 during 2018 and during 2019 with the moves we saw in the AUDUSD, remember that the AUD is seen as a proxy for risk sentiment, which means that it is expected to usually follow overall moves in equities, but that wasn’t the case back in 2018 and 2019, because even though the trade war saw some short-term jitters for equities, there were other drivers that kept stocks supported even though the AUD went through lots of downside.
Among other things, the Dollar saw massive upside as the US economy outperformed the rest of the world, and while the FED was busy hiking interest rates other central banks around the world were entering easing cycles as their economies were starting to slow.
So, like with most things in trading it’s never just one thing, it’s always a combination of factors that we need to keep in mind, and when it comes to risk sentiment and how it relates to swing or position trading it really comes down to the specific assets that we are trading and what the fundamentals are showing for the medium-term and longer-term for that particular asset, including things like monetary policy, fiscal policy, geopolitics, intermarket analysis etc.
So, hope that helps with the question Alexander, any other questions please don’t hesitate to let us know.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
