To avoid basing a trade solely on anecdotal evidence and my subjective opinion I decided to find some objective evidence to back up my claim. I headed over to Google , found a Google Trends chart and did some analysis on it. Since I can't post it here I'm providing a link to my blog post where you can find it along with the analysis: http://www.highprotrading.com/short-the-deflation/
There are literally limitless ways one could trade this so rather then putting on countless charts with I will instead provide a couple of guidelines and rules of thumb which anyone can apply to instruments they follow personally.
I suggest going long the euro (short the dollar), select energy and mining stocks and and shorting the long bond (US) with half a position. If the traded instrument goes up 3%-5% then add the remaining half position and put the stop below the current low. If on the other hand the instrument goes down do not do anything and wait. If it breaks the current low and if there is a bottoming pattern (divergence, reversal pattern etc.) then and only then add the other half position and put the stop below that new made low according to money management principles. The same thing applies to bonds and the dollar only in the reverse direction since you are shorting them.
The stop for the entire 100% position for each instrument shouldn't be more then 0.25%-0.5% relative to the total trading account. The suggested stop is a little bit lower than usual because these are highly correlated trades. You may be stopped out of some of those trades but hopefully those that remain will more than enough make up for the losses of the trades you were stopped out from.
This is a swing/position trade and my suggested holding period is at least 6 months. There's a lot of negative sentiment, pessimism and it takes time for the trades to mature. The sentiment is especially negative for the euro , I don't remember when it was that bad before. A lot of people will be selling prematurely thinking that it will turn back down but in my opinion corrections should be bought.
The euro will probably go higher precisely because there was such a negative sentiment. Nevertheless I suggest taking some profits at the 1.12-1.15 level, some at the 1.18-1.20 level and if the euro goes back to 1.22-1.24 (however unlikely it may seem now) you should be out and thinking about shorting again. The stop is the current low (1.04 level). You may even choose a lower stop if you take a smaller position, however if the euro drops below 1.00 then something is very wrong with the analysis and you should be out.
For and stock positions, if they rise 20% to 40% your indicators should start flashing and you should take some profits. After 6 months or so you should reassess the situation and decide depending on the unfolding pattern and the mass psychology at that moment if you should stay in the positions or close them or even reverse them but in any case some profits should be taken.
You can see specifically how I play the “Short the deflation trade” from the Open positions table from my portfolio, once again at my blog post: http://www.highprotrading.com/short-the-deflation/
This is my trading method, you may have a different one and trade other instruments but the direction of the trade should remain the same.
This is not investment advice and you are solely responsible for your actions. For a full disclaimer see here: http://www.highprotrading.com/disclaimer/
For a full list of instruments traded in the lifetime of the portfolio and for performance go to the Performance section: http://www.highprotrading.com/performance/