What is Risk Aversion?
By simple explanation. Risk Aversion is the inverse of risk tolerance. Risk averse is defined as the behavior of a trader to stay away from risky trading practices, even if those have high chances of profits. Risk averse traders prefer low risk, often low profitable, products to trade. Risk aversion is seen in trading of all products including stocks, bonds, funds, options, futures and currencies.
When trading, risk averse traders often stick to government securities, index funds, low-risk currency pairs, long-term options, and stable price commodities and futures. Although seems simple and less followed, risk aversion is the major factor for major market changes. A good example is now a days Forex market, where US Dollar is gaining against many other currencies, even in a period of US recession. This is because many investors and funds are now fear to invest in countries which have USA as major trading partner. Any recession in US market can produce magnified effects in those countries’ markets. Thus the risk aversion of major funds helps US Dollar to gain over others.
Following risk aversion strategy only does not produce any major profit to traders. Many successful traders practice risk aversion strategy to trade in difficult market conditions, and as a portfolio diversification method. Risk aversion trading strategies are also good for novice traders.
When trading, risk averse traders often stick to government securities, index funds, low-risk currency pairs, long-term options, and stable price commodities and futures. Although seems simple and less followed, risk aversion is the major factor for major market changes. A good example is now a days Forex market, where US Dollar is gaining against many other currencies, even in a period of US recession. This is because many investors and funds are now fear to invest in countries which have USA as major trading partner. Any recession in US market can produce magnified effects in those countries’ markets. Thus the risk aversion of major funds helps US Dollar to gain over others.
Following risk aversion strategy only does not produce any major profit to traders. Many successful traders practice risk aversion strategy to trade in difficult market conditions, and as a portfolio diversification method. Risk aversion trading strategies are also good for novice traders.
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posted by Daniel Pipitone at
4:28 AM
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