Risk-On / Risk-Off: Trading the Regime
Markets cycle between a greedy 'risk-on' mood and a fearful 'risk-off' one — and in the panic, the diversification you counted on quietly disappears. How to recognize the regime and respect what it does to correlation.
Asset returns are not drawn from one stable distribution — they behave as if the market switches between a small number of regimes. The two that matter most to a trader are risk-on (capital chasing return: stocks, high-yield credit, emerging markets, and growth-sensitive currencies all rise together) and risk-off (capital fleeing to safety: those same assets fall together while government bonds, the US dollar, and sometimes gold catch a bid). Most of the painful surprises in trading come not from any single steady state but from the transitions between these regimes — and especially from what happens to correlation when fear takes over.
The single global mood
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