Guide · Market regimes
Risk-On vs Risk-Off: How to Tell Which Regime the Market Is In
What risk-on and risk-off mean
“Risk-on” and “risk-off” describe the market’s mood. In a risk-on phase investors are comfortable holding assets that can lose value: shares, high-yield bonds, emerging-market assets, commodity currencies. In a risk-off phase they sell those and move to assets seen as safer: US government bonds, the US dollar, the Japanese yen, the Swiss franc, and sometimes gold.
The idea is useful because many markets move together when the mood changes, driven by the same flows of money. It also answers a practical question: when you look at a chart, is the move you see an idiosyncratic one, or part of a wave that is moving everything? A buy setup in a falling, fearful market has the tide against it, and a sell setup in a euphoric one has the same problem.
The signals to watch
No single indicator defines the regime. Look for agreement across several markets.
Stocks and volatility. The trend of a broad stock index is the most direct reading. The Cboe Volatility Index (VIX) is calculated from the prices of S&P 500 index options and is often called the market’s fear gauge; sustained high readings indicate that investors are paying up for protection. Compare the VIX with its own recent average rather than judging it against a fixed level, since what counts as high changes over the years.
Currencies. The yen and the Swiss franc have a history of strengthening when markets are stressed, while currencies tied to commodities and global growth, such as the Australian dollar, tend to weaken. The dollar often rises in a stress episode, since it is the world’s main funding currency; our Fed and forex guide explains why.
Bonds. In a flight to safety, Treasury prices rise and yields fall. But the bond market is also telling you about inflation and growth, so a falling yield can mean fear or can simply mean cooling inflation. Check it against stocks. If stocks and bonds both fall, the story is probably about inflation or rate fears, not a classic flight to safety. The shape of the curve is covered in the yield curve guide.
What drives the mood
Three groups of forces tend to shift the regime: monetary policy (tighter policy raises the price of risk, easier policy lowers it), growth and earnings (surprises in jobs, spending and profits) and shocks such as wars, banking stress or a pandemic. The shocks are the hardest to anticipate and the ones that most often flip the regime within days.
The regime also has momentum. Moods tend to persist for weeks or months, with sharp reversals. That is why measuring the current state is more reliable than forecasting the next one.
How to measure it simply
A rule-based way to avoid arguing with yourself is to write down the test in advance. For example, you could ask three yes/no questions each day:
- Is a broad US stock index above its own medium-term average (for example 45 trading days)?
- Is the VIX below its own medium-term average?
- Is the Treasury curve normally shaped rather than inverted?
Three yes answers describe a calm, risk-friendly backdrop; three no answers describe a stressed one; mixed answers mean the market is undecided. The exact parameters are a matter of taste, and any such test will lag at turning points and give false signals in choppy markets. The point is consistency.
That is the logic of the KriekTrade risk gauge, which turns this kind of reading into a single 0 to 100 score. It is published each day on our macro page, with the Fed stance and cycle phase, without the underlying market data. Zero means fear and 100 means greed.
Using a regime without over-trusting it
A regime tells you which way the tide is running. It does not tell you when a particular wave will arrive or whether a trade will work. A stale regime can flip suddenly, and a score of 85 is a statement about conditions, not a prediction. Use it as a filter on direction and size, and keep your stop and risk per trade defined for every position.
Common mistakes when reading the regime
- Calling the turn too early. A single down day in stocks is not a regime change. Wait for several signals to agree, or accept that you will often be a little late; that is the price of fewer false alarms.
- Treating the regime as a forecast. A risk-on reading says what has been happening. Regimes can flip within days when a shock arrives, so size every position as if the reading could be wrong.
- Ignoring the instrument. Even in a risk-on market, individual instruments can trend against the crowd because of their own news. The regime is a prior, and the chart still has to agree.
- Looking at one asset. The dollar can rise in a risk-off move and also in a hawkish-Fed move. The same price can have two causes, which is why you check stocks, volatility and bonds together.
- Forgetting the calendar. Central-bank meetings and major data can change the mood within minutes. Know when they are due; our macro page lists the next FOMC dates and BLS release dates.
How KriekTrade uses the regime
In KriekTrade, direction is gated, not guessed. A buy setup is only shown when price has closed above its daily 45-day exponential moving average and the long-term cycle allows buying; a sell setup only when price has closed below it and the cycle allows selling. The risk gauge and Fed stance sit next to the setup so you can see the backdrop at the same time. You can read more and look at the platform on KriekTrade. Educational only: trading leveraged products carries a high risk of losing money.
Sources and further reading
- Cboe Global Markets, Cboe Volatility Index (VIX) product page.
- Cboe, The Cboe Volatility Index: VIX white paper (how the index is calculated from S&P 500 option prices).
- Bank for International Settlements, Triennial Central Bank Survey 2022 (dollar on one side of most foreign exchange trades).
- U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates.
Charts and diagrams on this page are our own illustrations. Data and facts are cited to the publishing agency; wording and analysis are ours. See the editorial policy.
Risk warning. Trading forex, CFDs, futures and crypto carries a high risk of losing money rapidly, and most retail accounts lose money. For education only; this is not advice. This article is general education written by Tian Kriek of Kriek Institutional Research, the publisher of KriekTrade. It is not personal advice or a recommendation. See the risk warning and disclaimer.