What You Need to Know as a Trader in Kenya: 9 Best Lessons

Regardless of whether you are a day trader, swing trader, or position trader, having a good plan of action can’t be underestimated. 

A reliable strategy informs your trading decisions, offers you the necessary market information and helps you manage your potential trading risks.

To come up with the right strategy, you have to ask yourself some honest questions, learn from the mistakes made by you and your fellow traders in the past, and be ready to research and learn how the capital market operates.

As a trader you should also be willing to evaluate your trading strategy, to see if you are getting the desired results or not, and make the necessary adjustments.

We are about to dive into the nine important lessons that traders must note when trading in the Kenyan capital markets.

Briefly, here’s what this article will cover:

1. Have Enough Time for Trading
2. Understand the Market Cycles
3. Avoid Trading with all your Life Savings
4. Beware of Trading Scams
5. Keep Track of the Market News
6. Avoid Trading in Illiquid stocks
7. Trade in Instruments You Understand
8. Use Stop Loss and stop limit Orders
9. Don’t Ignore Demo Account

The 9 Best Trading Lessons

1. Have Enough Time for Trading

Trading is a crucial business and needs to be taken as a day job as opposed to a part-time job. It can be time consuming at times and require a lot of researching. It can also be extremely stressful, especially when you lose. 

As a trader you need to devote sufficient time to trading, if you wish to be successful. Capital markets are fragile and a slight lack of concentration can lead to a trader recording unanticipated losses.

For instance, when trading in a fast-moving market like the forex market using leverage, you can’t afford to be absent minded. Because the markets could change anytime and your funds could be lost as a result.

So you should create time to make a well thought out plan for entering any position, and have a powerful reason for making a trade. Using a passive strategy and trading a stock or currency based on someone else’s call could result in losses to you.

If you lack the time to actively manage, then you should consider investing in Mutual Funds & Fixed return asset classes.

2. Understand the Market Cycles

Market attitudes are not predictable but there is certainly a pattern in their movements. 

There are four phases of a market cycle:

• Accumulation phase
• Mark-up phase
• Distribution phase
• Mark-down phase

Phaseone-The Accumulation Phase

Sometimes a market reaches its lowest point where prices of stock are at their lowest point and begin to consolidate. Some experienced and institutional investors take advantage of this and begin to buy assets at very low prices with the hope that a recovery is about to begin.

This category of investors are risk-takers and don’t like to follow the crowd. They are known as contrarians. If they are wrong and the price of the stock does not recover, they could lose money. But in case the opposite happens, they make good money.

An example of a rally can be when the share price of Kenya’s Safaricom consolidates first and then is appreciated from around Kes. 24 in 2020 to Kes. 44 in 2021 on nearly a year-long Bull Run. 

Phase Two-The Mark-Up Phase

During this phase, the market starts to recover and stabilize. The price of a stock begins to go up as in the example of Safaricom above.

The media starts predicting the storm’s end, and soon the experienced investors who had bought assets in the accumulation phase begin to earn profits. Skeptical investors also start coming back to the market.

Phase Three- The Distribution Phase

In this phase, prices are still up but investors start to fear the market may become bearish. Whereas some begin to take their profits while they can.

 Phase  Four- The Mark-Down phase 

In this phase, prices begin to go down and the market becomes bearish. Some investors sell their stock to cut their losses at this point. While some remain optimistic about a rally and try to wait out for the storm.

Apart from understanding market phases, you also need to know the market peak and off-peak periods as well.

Peak periods may be early in the morning when the market has just opened and queued orders begin to be executed. The servers will be extremely busy during the first twenty to twenty-five minutes of the business opening. At this period the prices of stocks vary only to stabilize later. 

In case you expect the markets to be volatile and unpredictable during certain hours, it is wise to sit out and watch the market for a while before diving in.

3. Avoid Trading With all Your Life Savings

Statistics have shown that most day traders trading in the forex and derivatives markets lose money. Whenever a trader enters the market there are two possible outcomes – Profit or Loss.

Having said that, as a trader you should prepare for both scenarios and only trade with money that you can afford to live without. As a general rule, never stake more than 2% of the money in your trading account on a single trade.

4. Beware of Trading Scams

in Kenya should be wary of investment scams. Cheat brokers without licenses and sometimes cloned licenses operate in the market too. The Capital Markets Authority regulates the capital market in Kenya and grants licenses accordingly.

Traders should always check with the CMA for a list of licensed brokers before patronizing any broker.

For instance, there are only 6 CMA authorized Non-Dealing Online brokers for offering Forex Trading in Kenya to retail traders which include FXPesa, Scope Markets, Exinity Limited, Pepperstone, Windsor Markets, and HotForex. You should only open an account with these brokers if you are looking to trade forex.

For trading stocks and derivatives on shares listed on NSE, you should consider trading with NSE-regulated Stockbrokers such as Sterling Capital, AIB Capital, Genghis Capital, etc.

5. Keep Track of the Market News

When trading with actual money, traders also must be aware of global happenings such as politics, wars, and so on.Keep in mind that Central Banks always work according to their manifesto which may include things like heightening their Interest Rates and so on. This could affect your trade.

In case you are a stock trader for instance, before deciding to trade any company’s stock, an inquiry should be carried out on the financials of the company to gather the information that would let you comprehend the risks associated with the stock.

6. Avoid Trading in Illiquid Stocks

Illiquid stocks are stocks offered by small public companies and are hard to sell and convert to cash. Positions in stocks with low liquidity will be harder to come out of.

If you are a day trader, you should close your position before the end of the same business day. The difference between the stock price at the outset and the onset of the day makes up your profit or loss.

In cases of derivatives like futures on NSE, you are trading using margin money, and you could lose a lot of money if the position goes against you before the end of the settlement period. An outcome you may not be prepared for.

7. Trade in Instruments that You Understand

Diversification of risk can be a good thing for experienced traders but if you are a beginner, it’s safer to focus on two or three stocks or instruments that you understand. Study them properly and trade them only during the market hours. 

Concentrating on several stocks or many forex pairs (if you are a forex trader) at a time as a beginner will not give you enough time to research and analyze properly the instruments that you fully understand. This in turn is a recipe for disaster.

For instance, if you are a forex trader, then stick to major currency pairs like EUR/USD, GBP/USD, etc. If you are a stock trader, then you should stick to trading high-volume stocks on the NSE, and avoid any illiquid stocks.

Likewise, if you wish to trade foreign stocks listed on major exchanges, you can trade it as a CFD through licensed forex brokers.

Or you can purchase shares through licensed stock brokers. For instance, Kenyan investors can buy or trade US stocks through Hisa broker. They offer fractional shares in companies such as Apple, Tesla, Alphabet, and so on.

These fractions are created when an investor decides to reinvest his dividend by buying more stock. The dividend may not be enough to buy a round figure of stock so the investor may be allotted fractions of stock.

8. Use Stop-Loss and Stop-Limit Order

A trader may not be able to sit in front of the screen all day long overseeing price fluctuations. Stop-loss orders are automated to oversee the market and act on behalf of the trader.

Stop-Loss Orders Explained

A stop-loss order is an instruction conveyed by the trader to a broker to either buy or sell an asset once the price of the stock moves above a set price. This set price is known as the Stop price. Once the Stop Price is crossed, a market order to purchase or sell is triggered. The broker charges a fee for the stop-loss order.

For example,

Twende Kazi is a Kenyan day trader. He speculates company XYZ stocks will appreciate before the end of the day. He Purchases Safaricom Ltd. stock hoping to sell off when the price goes up.

Safaricom stock price per unit equals Kes.38.

Number of units bought= 100 units

Total capital invested= 3800 Kes (38 x 100)

Stop Price = 1 Kes

Unfortunately for him the price of the stock suddenly starts to go down while he is away. Once the price goes down by Kes. 1 to Kes. 37 so his automated stop-loss order exits his trading position and sells off the stock at the existing market price to a willing buyer. 

His loss is limited to just 100 Kes (3800 – 3700)

In case the stop order wasn’t in place, he stood the risk of losing more money if the price kept going down. If he was trading with a margin, then his risk would be higher.

Limit Orders

Brokers also have limit-orders on their platforms, just like stop-loss orders. Limit orders can also be used to buy the stock when the price goes above the set price. The Price and units of stock to be bought are set by him. Once that set price is crossed the system or broker’s platform automatically purchases the specified amount of stock on his behalf using the money in her account.

Limit orders explained

Limit orders are similar to stop-loss orders in every way except that the Stop Price is specific. Using the example above, for a Limit Order, let’s say a trader believes that the price of Safaricom would rise from Kes. 35 & go to Kes 40 from there.

So, the trade could set a limit order at Kes. 35 with taking profit at 40. Once the price of stock gets to 35 the trader’s position will automatically be opened with taking profit at 40.

9. Don’t Ignore a Demo Account

Yearning traders should sharpen their skills using Demo trading accounts for at least three months before going live. 

A demo account is provided for free by most brokers.

The account enables a trader to practice trading under real market-like conditions. Here you trade actual instruments at real market pricing, just that no money is involved.

When assigning a broker to open your trading account, caution must be exercised not to patronize unlicensed brokers. The Capital Markets Authority offers a lot of investor education information on its website. So it’s only wise that aspiring and existing traders in Kenya should visit it regularly to get the latest updates.

Trading FAQs

1. Can I lose my money while trading?

Yes, you can and it’s always stressful if you don’t exercise the necessary caution. To avoid this, you should do your research, create time to personally trade, and invest wisely.

2. Can I make money trading? Yes, you can. In case you implement the lessons you’ve learned here and have the time to do it yourself.

Bottom Line

Trading can be scary, especially when you don’t have the right information. But not anymore, after all the information shared in this article.

This article has offered you most of the information you need to know to either start or boost your trading business.

So it’s time to act by implementing the lessons learned and enjoying the results.