Risk Aversion

A risk-averse investor is one who, when confronted by two investments that can be expected to deliver a similar return, but have different levels of risk, will opt for the one with the lower level of risk. So, for example, when a forex robot provides forex signals for similar trades, but one is high-risk and one is not, the investor will follow the signal that delivers the ‘safer’ return. Risk-averse investor will often deny themselves higher rates of return, as safer investments will generally have lower rates.

Risk aversion in the forex market is a type of trading behaviour that is seen when a potentially unfavourable event happens that is likely to affect market conditions; for example, when risk-averse traders decide to liquidate their positions due to uncertainty and move them to less risky options.

In this context, then, forex traders opt to liquidate their positions in higher risk currencies, in order to take up positions in ones that are often described as ‘safe haven’ currencies, for example the United States Dollar (USD). Sometimes, when an investor chooses a safe haven currency they are taking a decision based on an emotional response to prevailing conditions, rather than a logical appraisal of economic data.

One way for new traders to test their level of risk aversion is to use a forex demo program for a trial period. By doing so, it is possible to take big risks and to make a loss in each individual virtual trade, as the losses will not be real. However, the lessons learned during the forex demo will be both real and valuable.