Risk Appetite

Risk appetite is how much risk a trader is willing to take on based on their personality, market conditions, and overall financial situation.

When market sentiment is positive, traders tend to feel more confident and are more likely to take on higher levels of risk. They might invest in higher-yielding or more volatile assets (like stocks, commodities, or emerging market currencies) because they are seeking higher returns, even though these assets might also carry a higher chance of loss.

Conversely, when market sentiment is negative, traders’ risk appetite usually shrinks. They may prefer safer, lower-risk assets to protect themselves from potential losses. This behaviour is often referred to as "risk aversion."