Deflation Trading Strategy (Backtest, Example, Python Code)

A deflation trading strategy refers to the methods and techniques you can use to invest and make money during a period of deflation. This includes how to spot the asset to trade, the direction to trade, and how to spread your investments. Examples of deflation trading strategies include buying real assets, like real estate, short-selling stocks, buying cash-rich stocks, and investing in Treasury bonds.

We show you two deflation strategies that return slightly below buy and hold, but spending considerable less time invested. The first strategy returns 6.74% vs. 7.73% for buy and hold, while the second returns 4.44% vs. 7.73% for buy and hold. While it might not sound that impressive, keep in mind that the strategies are invested 51% and 34% of the time.

Deflation is considered bad news for any country’s economy, and it’s generally not good for the financial markets, as prices of goods and services fall and companies’ profitability decline. However, periods of deflation may actually present an excellent opportunity for savvy traders and investors to snap the best investments. What is your deflation trading strategy?

In this post, we answer some questions about the deflation trading strategy. However, we start the article showing you two examples of what we can call a deflation trading strategy:

Table of contents:

Deflation trading strategy – trading rules and backtest

We show you two deflation trading strategies, and we start with the first one:

Deflation trading strategy with trading rules and backtest #1

For this backtest we need only one input: the inflation rate.

The trading rules are simple:

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Buy when the 12-month SMA of inflation is over the monthly inflation print; and
Sell when the 12-month SMA of inflation is below the monthly inflation print.

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This strategy is both easy to understand and execute. The equity curve looks like this:

The equity curve looks good, but it fails to beat buy and hold: 6.74% vs. 7.73%. Dividends are not considered.

Nevertheless, its