How to Read the Market Risk Compass
The Risk Compass is designed to help you adjust your risk exposure, not to time trades. Think of it as a weather forecast for the market. When conditions are favorable, stay fully invested. When pressure builds, start reducing. When the storm hits, protect your capital. The safety line is a fixed threshold that stays constant. The compass line moves in real time as new data flows in from multiple market metrics, so its position is always current.
The key is the relationship between the compass line and the safety line. The further the compass line sits above the safety line, the more bullish the environment. As it declines and approaches the safety line, begin trimming exposure. If it crosses below while still falling, step aside. When it starts rising back up from below, recovery is building. Once it pushes above and accelerates upward, conditions are strongly bullish again.
STRONG / EXTREME BULL
Compass line is far above the safety line with strong upward momentum. Market is very bullish and conditions are highly favorable for full risk exposure. Historically, this is where the biggest gains occur. Stay invested.
ABOVE LINE
Compass line is above the safety line in an uptrend. Market conditions are favorable so maintain your positions with confidence. Let the trend work for you and keep your allocation steady.
CAUTION
Compass line is declining and getting close to the safety line. Start reducing your exposure and be ready to act if it crosses below. This is an early warning, do not ignore it. Consider trimming positions and raising some cash.
SELL / REDUCE
Compass line has crossed below the safety line while trending downward. This has historically preceded significant market weakness. Reduce risk aggressively and prioritize capital preservation. You can always re-enter when conditions improve.
RECOVERING
Compass line is below the safety line but starting to move back up. Recovery is building so watch for a confirmed cross back above the safety line before adding risk back. Patience here pays off.
★ KEY PRINCIPLES
1. The compass is a risk management tool, not a trade signal. Use it to size positions and adjust exposure, not to time entries and exits.
2. Direction matters more than level. A compass at 90 and rising is very different from a compass at 90 and falling. Always consider the trend.
3. Respect the safety line. When the compass crosses below the safety line while trending downward, historical precedent strongly favors reducing risk.
4. Be patient during recovery. The compass rising from below the safety line is promising but wait for a confirmed cross back above before adding full exposure.
⚙ WHAT DRIVES THE COMPASS
The compass aggregates multiple market health metrics into a single reading. These include liquidity conditions, volatility regime, credit spreads, market breadth, and momentum internals. The safety line is a fixed threshold that stays constant. The compass line moves in real time as new data flows in from these metrics, so its position is always current. When multiple metrics deteriorate simultaneously, the compass falls faster, providing earlier warning of potential drawdowns.
💰 SUGGESTED RISK ALLOCATION
80-100%
Strong Bull / Above Line
These are general guidelines. Adjust based on your personal risk tolerance and investment horizon.
MSFT
AAPL
NFLX
GOOG
TSLA
AMZN
^SPX
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BTC-USD
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