It's more vital than ever to reassess risk

RISK appetite is one of those phrases that traders tend to bandy about. In these uncertain times, the words are in the news more than ever. A cursory glance over the research notes, market commentaries and news reports of the past few weeks would have you confused. One day a research note claims that risk appetite is on the up, and the next a news report argues that it is down. But what is risk appetite? And how should the market&rsquo;s general opinion affect your trading?<br /><br />Risk appetite is traders&rsquo; desire to move into asset classes where the rewards can be greater but the chances of getting those rewards are lower. Obviously, your trading strategy depends on your attitude to risk.<br /><br />If you are risk-loving, then you might choose currencies such as the Australian dollar, which is less liquid but more volatile and therefore the profit and loss potential is greater. If you are risk-averse, you might choose the US dollar, which tends to be highly liquid and is seen as a safe-haven.<br /><br />But with forex strategists not seeming to be able to agree on whether investors are risk averse or risk loving, how can the private FX trader make sense of risk and place their trades accordingly?<br /><br /><strong>RAPID CHANGE</strong><br />The first thing to remember is that currency markets move particularly quickly, and so it is rational that a trader&rsquo;s attitude towards risk can also change quickly. It is not necessarily wrong for your attitude towards risk to change day-by-day as new data comes out. So don&rsquo;t worry if your attitude towards risk changes rapidly. You are not mad.<br /><br />The second thing to remember is that when you are trading currency markets it is easy to get swept on a tide of sentiment. A research note published by investment bank Barclays Capital the other day said that across the board investor positions have become progressively bullish in risky assets in recent weeks.<br /><br />But it notes that: &ldquo;These positions appear to have been built up rapidly and look more stretched in FX than in any other asset class.&rdquo; So, try to stay rational and stick to your trading strategy and make sure your own position is not overstretched.<br /><br /><strong>IN CONTROL</strong><br />It&rsquo;s all about staying in control of what you are doing. If you think that other people are being too risky, then don&rsquo;t be swept up in the emotion of it all. Mark O&rsquo;Sullivan, director at Currencies Direct, says that a lot of traders are sitting on the sidelines waiting for forex pairs to hit the right levels, but &ldquo;these levels are not here yet&rdquo;.<br /><br />Markets will continue to be unclear over the summer and data is likely to be mixed, especially as they try to make sense of second quarter earnings and economic figures. This means that we are likely to see continued confusion and conflicting opinions and reports about risk and risk appetite.<br /><br />The key is to remember that you are in the trading game for the long-run. &ldquo;Your long-term position could be undermined by short-term moves, warns George Tchetvertakov. &ldquo;Keeping an eye on the news is very important right now.&rdquo;