Navigate High Inflation: Top Trading Tips for 2024
Are high inflation rates affecting your decision-making when it comes to trading?
With prices rising and your purchasing power diminishing, it’s easy to feel overwhelmed about how to make the best financial decisions when it comes to trading.
How to trade during high inflation
While high inflation might appear to be a real challenge when it comes to trading, it doesn’t have to be a scary prospect. In this article, I’ll give you a balanced, step-by-step guide on how to trade during high inflation, along with examples from the real world that illustrate key points.
Step 1: Understand the Impact of High Inflation
High Inflation is bad for financial markets because it erodes purchasing power; as it rises, consumers have to pay more for the same goods and services. In the 1970s, the United States and other countries suffered from what came to be known as stagflation – a mix of high inflation and stagnant economic growth.
Because of the economic climate, interest rates shot through the roof. The impact on asset classes was equally pronounced. Bonds, traditionally a conservative investment, suffered as interest rates rose.
Gold, on the other hand, was a good hedge against inflation, and investors began to see it in that light. The point of looking at how markets responded to historical shifts is to help you apply that knowledge to your trading if the conditions recur. But the flip side of the coin is that inherent risk also rises. Markets become more volatile and more uncertain.
Step 2: Choose the Right Assets
Asset selection is especially important when trading in an inflationary environment, as certain asset classes have historically performed strongly during these periods while others tend to underperform. Here are some examples.
– Commodities: Often considered a good hedge for inflation, commodities such as gold, silver and oil can perform well when inflation is a concern, such as in the 2008 financial crisis. But commodities can be unpredictable. In 2020, oil prices plunged in the spring, taking many traders by surprise.
– Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) provide protection against inflation, which makes them particularly attractive during periods of high inflation. In fact, when inflation surged during the COVID-19 pandemic, many investors switched to TIPS to protect their portfolios. However, TIPS tend to offer lower returns than other investments, especially in low-inflation environments.
– Real Estate: Since property values and rental income often rise with inflation, real estate can serve as a hedge against inflation. For instance, during the 1970s, property values increased in sync with inflation. On the other hand, there were notable property-value losses during the housing crisis of 2008.
If you concentrate on these assets, you might be able to shield your portfolio from the vagaries of out-of-control inflation. But you also need to remember that they come with their own risks.
Step 3: Diversify Your Portfolio
Diversification is one of the golden rules of trading, and it’s especially important in high-inflation periods because it cuts down on the risk of disastrous losses in a sector that underperforms.
For example, when the tech bubble burst at the turn of the 21st century, investors with a diversified portfolio (ie, not all invested in tech stocks) saw much less damage to their portfolios than those who had invested all their money in tech.
A diversified portfolio might include commodities, stocks, bonds, and real estate, but diversification doesn’t insulate against all risk. When the 2008 financial crisis hit, nearly every asset class’s value declined.
Step 4: Monitor Central Bank Policies
Central banks control the flow of money into and out of an economy through monetary policy and therefore play a significant role in how inflation is managed.
Traders who are able to anticipate central bank announcements, changes to interest rates and forecasts for the economic future are better equipped to take action when inflation heats up.
For example, in the early 1980s, the US Federal Reserve under Paul Volcker responded to rapidly rising inflation with a massive increase in interest rates, which triggered a recession but eventually brought prices under control.
Traders who got ahead of this move and made adjustments to their trading strategies were better prepared to buffer the impact on their portfolios. However, central bank decisions are often unexpected, leading to increased volatility and potential losses in the markets.
Step 5: Focus on Value Stocks
When inflation is high, growth stocks (companies whose earnings are expected to increase rapidly) can get hit hard because it becomes more expensive for them to borrow money, and because consumers spend less. Meanwhile, value stocks (companies with strong fundamentals that are trading at a discount relative to their earnings) can do better.
For example, after the recovery from the financial crisis of 2008, value stocks in sectors such as utilities and consumer staples (the basics) outperformed growth stocks as investors sought safety. Yet even value stocks can suffer in market meltdowns and their fortunes depend on market-wide conditions, such as the COVID-19 recession when all stocks suffered.
Step 6: Consider Forex Trading
Inflation is another factor. High inflation can lead to large swings in currency values. In the early 2010s, the currency of Zimbabwe hyperinflated. Obviously, this is highly volatile, and losses can be huge for those with little experience.
Step 7: Implement Risk Management Strategies
High inflation is going to make trading more volatile than ever before, so risk management is a crucial factor to consider.
1. Reduce leveraged trading
2. Trade only with money you are comfortable losing
3. Trade longer-term opportunities rather than short-term trades
4. Avoid trading penny stocks
5.Trade in stable assets, such as index funds
6. Make sure your investments won’t lose value in a bear market
7. Consider using tools like stop orders and take-profit orders
8. Diversify your portfolio.
– Set Stop-Loss Orders: Stop-loss orders are orders to automatically sell an asset as soon as its price reaches a certain level that is lower than its current level. Stop-loss orders can mitigate losses but in extreme market conditions, such as when prices gap, they can lead to losses that are larger than expected.
For example, gapping was a major factor behind the 2015 ‘Flash Crash’ in the US stock market, where ‘stop-loss’ orders sold securities at prices much lower than planned because of the rapid price declines.
— Position Sizing: You have to decide how much capital to commit to a trade, based on the overall size of your portfolio. For example, you might just say you won’t risk more than 2% of your portfolio on any one trade, which is a rule that many successful investors use. This protects your portfolio against major losses, but it also means you’ll never make much money.
– Hedge your positions: Taking offsetting positions to reduce risk in the face of adverse market movements. Say a trader short-sells stocks and holds long positions in commodities during periods of high inflation. The opposite of market timing. Hedging is an important tool for risk mitigation, but it can also increase exposure to market volatility if done hastily or reactively.
Following these strategies can help protect your investments from the worst rises and falls of the market, but no strategy can completely eliminate risk.
Step 8: Stay Informed and Educated
The market is a dynamic place, especially in times of high inflation. As a result, you need to keep an eye on what is going on. This means reading up on market trends, economic data and geopolitical events. For example, during the 2008 financial crisis, those who stayed more informed about government bailouts and reactions of the government to the crisis were often more likely to adapt their strategies to new market movements.
Also, reading financial news, listening to webinars and joining trading communities can help you to stay up-to-date with the financial markets.
However, even if you do a significant amount of research, markets can still be unpredictable and, in the end, what happened in the past might not have any connection to what will happen in the future. No matter how much you prepare yourself for it, the fact is that education will help you make the right decision, but sometimes things do not go according to plan.
Step 9: Practice Patience and Discipline
Patience and discipline are the most vital character traits to possess as a trader. However, during high inflation it’s even more critical to refrain from making rash decisions. For example, many traders lost fortunes during the dot-com bubble as they were chasing quick gains without considering the future. The market can present great opportunities, but the conditions that dictate them can change as quickly as your emotions.
To maintain a level head, focus on your long-term goals and stick to your trading plan.
Being disciplined and never reacting to short-term flare-ups will help you stay calmer during high inflation environments. Even the most steadfast traders can experience losses, especially in volatile markets, so always approach trading with an awareness of the risks.
Step 10: Trade with VPTrade for a Balanced Experience
Increased inflation is a highly dynamic situation that requires a trading platform with the right features. For example, it’s important to have a low cost of entry into trades, so you don’t give away your profits to trading fees, as well as broad access to different trading instruments.
That’s why using a platform like VPTrade is the right decision. It has a super easy and user-friendly interface and is also one of the most cost-effective platforms with low trading commissions on the market.
Another perk of using VPTrade is the educational resources available to traders. There are several webinars with market analysis and trading strategies that will keep you up to date with the latest inflationary trends in the market.
In addition, VPTrade customers can contact the company’s customer support team 24/7.
VPTrade provides instruments and help to decisions, but no platform can guarantee profitability or risk-free trading. The profitability of a trade depends on your strategy and risk management. VPTrade is more of a partner than a. The final outcome of trader’s decision
Best Trading Practices and Risks Involved
Some experts believe that high inflation can make trading more difficult but, with the right risk management and following best practices, you can still have a successful experience.
Best Practices:
– Do Your Homework: Never trade without conducting solid research on the markets or products you are trading. Understand the trends, economic and other factors that affect the markets you are interested in. Take the case of a trader who studies historical trends in inflation, and how those trends translated into commodities, currencies, and stocks. Even in these cases, the trader may be caught off-guard by rapidly changing market conditions.
– Set realistic goals: Think about a realistic target profit level based on your risk tolerance and trading experience. It’s good to have a goal, but be careful that you don’t set a profit target that’s so extreme that it’s likely to lead you to behave impulsively in the heat of trading. Obviously, having a goal does not guarantee that you will meet it, especially when the market is unstable.
– Manage your emotions: Emotionally-driven trading is the greatest trap for many traders. Do not abandon your trading plan, and make decisions based on fear or greed. However, even with the best intentions, emotions can affect decisions, so always have a strategy to manage them.
Risks Involved:
– Volatility of the market: When inflation is high, market volatility is likely to increase causing a fall in prices.
and the swings can create opportunities, but also increase the possibility of devastating losses. Volatility was exposed as dangerous during the 1987 stock market crash, known as ‘Black Monday’, when about 20% of the market’s value was lost in one day.
– Interest Rate Risk: As central banks raise interest rates to tame inflation, some fixed-income assets such as bonds become less attractive and may decline in value. Managing interest rate risk is an important part of portfolio management but, given the difficulty involved in forecasting interest rate moves, it can also lead to unexpected losses.
– Liquidity Risk: Some assets can become semi-illiquid in the context of high inflation: it can be difficult to buy or sell them at the price of your choice. Pay attention to liquidity risk, which can result in you not being able to implement trades, and even losing money.
With these best practices in mind, your chances of trading profitably during high inflation will be higher, and your portfolio will be less susceptible to any sudden market changes. Please note that trading with leveraged products, such as forex, binary options, and CFD trading, involves risk. It is possible to lose all of your invested capital.
You should never trade money that you cannot afford to lose and never trade with borrowed money. You should not trade with money that is earmarked for important expenses, such as housing costs or college tuition.
Lastly, you should consult an authorized trading instructor, or a licensed trading advisor, if you are new to the trading world. Anyone under the age of 18 should seek their parents or guardian’s permission before trading.
Despite it being a challenging trading environment, it is possible to trade during high inflation.
Disclaimer:
The information presented herein have been prepared by VPTrade and does not intend to constitute Investment Advice. The Information herein is provided as a general marketing communication for information purposes only.
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and education purposes. Personal Opinion of the Author does not represent and should not be construed as a statement, or an investment advice made by. Recipients of this information should not rely solely on it and should do their own research/analysis. Indiscriminate reliance on demonstrational or informational materials may lead to losses. Past performance and forecasts are not reliable indicators of the future results
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