Risk Appetite is the general level of risk a trader can tolerate.
It measures a trader’s “risk hunger”.
If risk sentiment rises and conditions are favorable, risk appetite increases and traders are more willing to purchase assets with higher yields and/or potentially greater volatility.
In financial markets, this usually means traders prefer to buy stocks, commodities. Cryptocurrencies and currencies with higher interest rates.
When traders have low risk appetite, the market is said to be “Risk Averse“.
In foreign exchange trading, risk aversion refers to traders selling high-yielding currency positions and shifting funds to safe-haven currencies.
This often occurs during periods of uncertainty and high volatility, so-called “risk-averse” environments.
In turn, periods of high risk appetite encourage traders to take risks, creating a “Risk” environment.
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