Is high inflation giving you trading jitters? You’re not the only one.
With prices surging and the purchasing power of your money declining, it can seem like there is too much to take in when you look at the financial markets.
But trading amid high inflation doesn’t have to be scary, overwhelming, or stressful.
How to trade during times of high inflation
You can make decisions that support your financial objectives if you understand how the markets work and follow some strategic steps.
This balanced, step-by-step approach can help you navigate the opportunities and perils of trading amid high inflation.
Step 1: Understand the Impact of High Inflation
However, before we get into the trading strategies, it’s important to remember how high inflation impacts the markets.
Higher inflation erodes the value of money, and with the prices of goods and services rising, central banks often increase interest rates to curb inflation.
In turn, the value of certain asset classes may fall (eg, bonds which become less attractive as interest rates rise) while the prices of others may rise (eg, commodities such as gold and oil which become inflation hedges).
While recognizing potential shifts in the market is important when it comes to adapting your trading strategy for a high-inflation environment, there is a risk that market shifts can lead to large amounts of volatility and a high-risk environment.
Step 2: Choose the Right Assets
Picking the right assets is essential when trading during periods of high inflation. Some asset classes have historically performed better during inflation, while others have not.
Beginner’s Forex Trading: 10 Tips You Need To Know
Here are some options to consider:
– Commodities: Physical goods such as gold, silver and oil are often considered a good hedge against high inflation because they hold their value or appreciate as currency does the opposite. Commodities can be exceptionally volatile, however, and extreme price swings can lead to losses.
– Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) are government bonds that increase in value with inflation, offering a low-risk alternative. However, as with conventional bonds, interest rates on inflation-protected securities can be lower than other investment options, particularly when inflation is low.
– Real Estate: Real estate is a classic inflation hedge because prices and rental income often rise with inflation, but real estate investments may be illiquid and vulnerable to market downturns, especially during an economic recession.
By concentrating on these, you might be able to defend your portfolio against the scourge of high inflation – but you should also keep in mind the risks associated with each type of investment.
Step 3: Diversify Your Portfolio
Diversification is perhaps the first rule of trading and when inflation is high, you need to diversify even more.
Spread your investments among different asset classes to protect yourself against the risk of a single sector in your portfolio underperforming. Include commodities, stocks, bonds, and real estate among your investments to build a balanced portfolio.
Diversification won’t completely protect you from risk. When market conditions become choppy and volatile, even a well-diversified portfolio can incur significant losses.
Step 4: Monitor Central Bank Policies
Central banks are the key actors that control inflation through their monetary policy. It is important to monitor announcements and press releases from central banks, interest rate changes, and economic outlooks when trading during high inflation.
For instance, if a central bank announces that it is planning on increasing interest rates, then this can affect the value of currencies, bond prices, and stock markets. However, predicting what a central bank will do is difficult, so sometimes unexpected policy decisions can lead to market volatility and potential losses.
Step 5: Focus on Value Stocks
When inflation is high, growth stocks (companies with earnings forecast to grow fast) tend to lag, as higher debt costs eat into company profit margins and consumers spend less.
the same time, value stocks (companies with solid financial foundations that trade at low prices relative to their earnings) tend to do well—they sport good cash flows, lower debt levels, and market positions that are often more deeply entrenched. But even value stocks can get hit during market downturns.
How they perform depends highly on the broader economic picture.
Step 6: Consider Forex Trading
Meanwhile, high inflation can lead to large fluctuations in currency values, creating opportunities for speculation in the forex market. For example, by buying the currency that is projected to appreciate against a currency that is expected to depreciate, the forex trader can profit.
Sometimes, currencies from countries with low inflation and good economic policies strengthen against currencies from countries with high inflation. Forex trading is very speculative, and the risk of loss is high.
It is very difficult to predict the value of a currency and is even more challenging to predict the value of a currency against many other currencies. The volatility of the currency markets is high. Forex trading can result in huge losses for naive traders.
Step 7: Implement Risk Management Strategies
Risk management during high inflation is particularly important because trading can be much more volatile.
Here are some risk-management tips:
How to Trade Gold in South Africa? Your Guide to Gold Trading Success
For example: Stop-loss orders, which automatically sell an asset when the price reaches a specific level, can help limit losses, but prices in volatile markets can gap past the stop-loss level and lead to greater losses than originally expected.
Position sizing: Determine your position size on each trade according to your overall portfolio size. This limits the downside risk to your portfolio but also limits your upside potential.
Hedge Your Positions: The simplest way of hedging is to go long on an offsetting position in an asset class that may move in the opposite direction to the original asset.
So, short-selling stocks alongside holding a long position in commodities may act as a hedge, but doing this incorrectly can just add to your exposure to market moves.
Employing these techniques will help to protect your portfolio and get you through the bumps in the road – although no strategy can ever remove risk.
Step 8: Stay informed and educated.
The market is a dynamic environment, especially in times of high inflation. It is important to keep yourself up-to-date on what’s happening in the markets, economic indicators, and geopolitical events.
Reading financial news, watching webinars, and joining trading communities are some of the many ways to keep abreast of the latest information.
However, despite doing the best possible research, market movements can be unpredictable and past performance is not indicative of future results. Whatever you do, always stay educated and increase your chances of making the right decisions. But the reality is, anything can happen.
Step 9: Practice patience and discipline.
Patience and discipline are two of the most important qualities for a trader at any time. These characteristics are even more important in high-inflation environments. Market conditions can change in an instant and without warning, and it can be tempting to react emotionally to short-term movements in the market. Instead, stay focused on your goals and trading plan.
When you can resist the urge to react emotionally to market movements, you’ll be better prepared to manage a high-inflation environment.
Of course, you’ll still likely suffer losses from time to time, even as a disciplined trader, simply because high inflation markets can be so volatile.
Step 10: Trade with Finbok for a Balanced Experience
When you decide to start trading during high inflation, the first challenge is choosing a reliable platform.
Finbok is one that offers an easy-to-use interface, low fees, and a huge selection of trading instruments, which are important for both beginner and pro traders.
To enhance your trading career during high inflation, you can get support from Finbok educational materials, market analysis, and 24/7 live customer support.
No platform can guarantee a profit or eliminate risks. Finbok provides tools and resources that can assist you in making informed decisions, but your success as a trader during high inflation depends on how you implement your own strategies and risk management skills.
Best Trading Practices and Risks Involved
High inflation environments can make trading difficult but also offer good opportunities depending on your outlook. It’s important to follow best practice to protect yourself and understand the downsides.
Best Practices:
– Thorough Research: Doing your research and taking the time to understand the bigger picture will help improve the odds in your favour. Know what’s going on in the market, what the economic trend indicators are saying, and the technicals of the asset you’re trading – but the market can still turn against you even if you’ve done all your research.
– Set Realistic Goals: When setting goals for your trades, be realistic. Don’t set unrealistic goals for your profits based upon a random outlier or hot stoke. Goals help you make better decisions, but don’t be surprised when they aren’t always realised, especially in volatile markets.
– Check Your Emotions: Emotional trading is one of the best pitfalls of trading. Follow a trading plan and avoid decisions based on fear and greed. However, in the heat of the moment you will still make irrational decisions, so make sure to have an escape plan to keep emotions in check.
Risks Involved:
– The Prices You Pay: When inflation is high, it often means that markets become volatile and prices fluctuate wildly. That might create opportunities, but also the risk of losing a lot of money.
– Interest Rate Risk: As central banks continue to hike interest rates in an effort to curb skyrocketing inflation, securities such as bonds could suffer from declining prices. Interest rate risk is an important factor in portfolio management, but predicting market interest rate movements can be difficult to forecast and might result in unanticipated losses.
Liquidity Risk: While inflation runs high, certain assets can lose liquidity (ie, it will be harder to buy or sell them at the price you want). Pay attention to liquidity risk: you might have to deal with execution risk (not getting the trade done) and the potential for losses.
Following these best practices and taking into account the risks, you can benefit from the high inflation and safeguard your investments from unexpected market changes, but remember that trading is risky and there are no guaranteed profits or success.
Trading during periods of high inflation isn’t easy.
But it is possible with the right strategies and mindset. If you grasp the implications of high inflation, choose the right assets, always diversify your portfolio, and implement risk management strategies, you can survive and even thrive, even in the most challenging trading environments.
The key is patience, discipline, and continuous education. In this chapter we provide you with the framework, information and tools to help you make better trading decisions.
With Finbok as a comprehensive platform for trading, you will have everything you need. Remember, only trade what you can afford to lose.
