Risk On Risk Off Trading Strategy (RORO): Backtest, Performance, and Examples Analysis

One often-mentioned expression in the financial markets is “risk on risk off”. What is it, and can you use it to develop a profitable risk on risk off trading strategy?

A risk on risk off trading (RORO) strategy takes advantage of the shifting market sentiment that influences the performance of different asset classes. When it is “risk on” typical risky asset classes tend to go up while more defensive asset classes less so (even go down).

Let’s look more closely at the risk on risk off concept and how you can develop such a trading or investment strategy.

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What is a risk on risk off strategy?

A Risk On Risk Off (RORO) strategy is a trading and investment approach that seeks to take advantage of the shifts in investor risk appetite and sentiment across different asset classes.

Put short, the strategy involves buying higher-risk assets during “risk-on” periods and selling them during “risk-off” periods, while simultaneously buying safer assets during risk-off periods and selling them during risk-on periods.

In the media, this strategy is frequently mentioned, especially when crypto and Bitcoin takes off.

Investors tend to favor higher-yielding, higher-risk assets such as stocks, high-yield bonds, crypto, emerging market currencies, and commodities in a risk-on environment. In contrast, investors tend to favor safe-haven assets such as US Treasuries, gold, the Swiss Franc, and the Japanese yen during a risk-off period (this is just examples and no investment advice).

The RORO strategy seeks to profit from these shifts in investor sentiment by identifying and trading assets that are likely to benefit from a risk-on or risk-off environment. There are many ways we can make a risk on risk off strategy, and further below we show several different methods and strategies.

Which assets are typical risk on assets? What does it mean?

Risk-on assets are typically those that have a higher potential for return but that also includes a higher risk, of course. Such assets tend to perform well during periods of positive market sentiment and economic growth, and their prices are often positively correlated with economic growth and inflation.

On a personal note, we suspect a lot of this is due to FOMO (Fear Of Missing Out – what is it?). This is a very powerful force and brings