RoRo, or Risk On/Risk Off, is a popular forex indicator and trading strategy that can help traders measure market sentiment and discern whether a bullish or bearish trend is more likely to form in the near future. 

RoRo is used as an indicator or framework to assess market sentiment and make trading decisions.

 When the sentiment is Risk-On, traders might favor buying currencies associated with higher interest rates and more aggressive economic growth. 

In a Risk-Off sentiment, traders may look to buy safer currencies and assets.

For example, let’s apply the RoRo indicator to the EUR/USD pair to see the results:

As we can see, RoRo can fluctuate greatly on a wider time frame, which means that this indicator alone might not be enough to base trading decisions on.

Using support and resistance levels and Fibonacci retracements can help add clarity to the values generated by the RoRo indicator. 

Risk-On

Risk on refers to a market sentiment where investors and traders are willing to take on higher levels of risk.

During a "Risk-On" sentiment, market participants are generally more optimistic about economic conditions and are more likely to invest in higher-yielding assets, such as stocks and commodities.

This sentiment can be associated with positive economic data, increased confidence, and a willingness to buy riskier currencies in the forex market.

While a “Risk-On” reading may be similar to a bullish trend, the two may not always be perfectly aligned, so it is important to use the help of volatility indicators to pinpoint trend formations and decide when to enter the market. 

Risk-Off

On the other hand, "Risk-Off" is the opposite sentiment. It occurs when investors and traders become more risk-averse and seek safer assets, typically due to concerns about economic stability or global uncertainties.

In a "Risk-Off" environment, market participants tend to sell off riskier assets and invest in safer ones, such as government bonds or safe-haven currencies like the US Dollar (USD), Swiss Franc (CHF), or Japanese Yen (JPY).

Structuring a trading strategy around the values generated by the RoRo indicator comes with a number of advantages and disadvantages.

In general, it is advisable to use other indicators in conjunction with RoRo to avoid false signals. 

Pros

• Simple Sentiment Gauge: RoRo provides a straightforward way to assess the prevailing market sentiment. It categorizes market sentiment into two broad categories, which can make it easier for traders to understand whether the market is risk-on or risk-off at a glance
• Broad Market Insight: RoRo sentiment takes into account a wide range of factors influencing market sentiment, including economic data, geopolitical events, and investor psychology. This broad perspective can help traders make informed decisions and anticipate potential market shifts
• Risk Management: RoRo can be a valuable tool for risk management. It can prompt traders to adjust their positions or risk exposure in response to changing market sentiment. When sentiment is risk-off, traders may reduce exposure to higher-risk assets, potentially protecting their capital

Cons

• Simplistic Approach: While RoRo provides a basic sentiment gauge, it oversimplifies market dynamics. Forex markets are influenced by a multitude of factors, and reducing sentiment to just two categories may not capture the full complexity of market conditions
• Delayed Reaction: RoRo sentiment can sometimes lag behind market events. By the time a risk-off sentiment is widely recognized, significant price moves may have already occurred. Traders who rely solely on RoRo may miss early warning signs of changing market conditions
• False Signals: Like any sentiment indicator, RoRo is not foolproof. It can produce false signals or misinterpret market sentiment during periods of mixed or indecisive market conditions. Traders who rely solely on RoRo may make incorrect trading decisions

• RoRo, or Risk-On/Risk-Off, is an indicator that is often used in forex to measure market sentiment
• When the indicator shows “Risk-On”, investors tend to assume more risk, as they expect more optimism on the market and possibly a bullish run 
• When the indicator shows “Risk-Off”, investors tend to become more risk-averse and invest primarily in safe-haven currencies, such as the USD, JPY, and CHF 
• RoRo is often used in conjunction with other indicators, such as Fibonacci retracement levels to avoid false signals