Seven ways to manage risks as an active trader in Kenya

In a Volatile market environment, the risks involved for active traders is even higher as the markets can move against your direction very quickly.

For example, the Interest Rate Hike in the US which is expected to take place in March 2022 can have affect in the global stock, currency & other capital markets. So, active traders must know how to navigate this situation.

In this article, we will cover some points on how investors and traders in Kenya can manage their risks in volatile economic circumstances.

What is the Risk for Traders & Why Risk Management matters?

Every capital market carries a risk, and that risk is even higher for traders as compared to investors.

Risk of losses creeps in when the market is not moving in the right direction based on your plan or expectations. Markets can move in the opposite direction of your position due to investors' risk sentiment; which can be caused by several factors like economic events, business policies, market forces, interest rates, inflation and so on.

Risks vary; and can be curbed or managed depending on the level of your exposure to necessary knowledge that can be of help in that aspect.

What is Risk Management?

Risk management skills in an investment or a trade can simply be defined as when a trader or investor has the ability or knowledge to identify, evaluate and lessen risks of losses in an investment.

Apart from the fact that traders & investors in Kenya need to know various strategies on how to mitigate risks, it is also very important for them to know about risks of an investment in advance so that they can endure if things go awry.

Trading in Kenya in various instruments like forex, stocks are a complex process; thus, knowledge of risk management strategy will be greatly helpful so as to secure your source of income to a very high level.

For an active trader who wants to keep himself/herself afloat in the trade, managing risk should be the major priority as a bulwark against potential losses.

How can Traders Manage Risks?

Dealing with Licensed Brokers

In Kenya, before you could engage in the trade of stock exchange or Forex, you register with a broker. It should be noted that you have to trade through a broker that is well regulated by Capital Market Authority, CMA.

The move is very necessary because all brokers that are licensed or regulated by CMA are held accountable by government regulators.  By this, the broker would ensure the safety of your investments or funds, it would also ensure that the broker won’t indulge in any malpractices, would follow the regulator’s code of conduct and work in the best interest of the client.

For example, trading forex in Kenya is legal, if you trade via CMA regulated brokers and there are only six CMA authorized non-dealing Online Forex Brokers currently. These include FXPesa, Pepperstone, Scope Markets, Exinity, HotForex & Windsor Markets.

If you are trading with an unlicensed forex broker then you are exposing yourself to third party risk associated with the broker in event that the broker you are trading with is a scam or it fails.

Similarly, if you are a stock trader in Kenya, then you should only trade with NSE Licensed Stock Brokers for the safety of your funds.

Registering or dealing with a recognized and authorized broker is one of the ways you can reduce risks of losses arriving from third party risk in the course of trading.

If there are any cases of scam or fraud in the hands of a regulated broker in Kenya, you can take legal action against them and you may be compensated up to Kes. 50,000. But in the event of dealing with an unlicensed broker, legal action of compensation is not possible.

For example, the investors of troubled brokerage Discount Securities Ltd. were issued maximum compensation of Kes. 50,000 via the CMA’s Investor Compensation Fund.

Use a Stop Loss

The usage of stop-order is highly advisable for new traders who are just getting into day trading in Kenya.

Stop-orders are the orders you place on your broker’s platform to get you out of trade in an open position if the market is moving against you. That is when you "stop your loss".

You place the order when the underlying market price gets to a particular level. The usage of this strategy makes good sense towards protecting your downside. With this method, a trader can leave his trading screen with the belief that there is a protective measure put in place and would help in mitigating losses to some degree.

All the forex brokers offer Stop Loss & Limit orders on their platforms. With the stop-orders in place, traders will be able to sense-check the trade in case it is going against your trading plan.

Some traders often ignore the significance of stop-loss and this makes them incur considerable losses beyond what they can bear. This would mean that you are risking beyond the level that you can control.

Determine your Risk-to-Reward Ratio

One of the costly mistakes investors in Kenya makes is how to set their risk/reward ratio or not having it at all.

Setting your risk-reward ratio properly goes a long way in helping to improve your chances of becoming profitable as time goes on.

RRR measures the distance between entry point and your stop-loss. It will help you in limiting orders that will protect your investment capital.

It is highly recommended for traders to set risk-reward ratio to a minimum of 1:2. Traders should know that risking Kes. 50,000 to make Kes. 10,000 is never a good trade, because the downside risk is too high.

If you place trades with bad rewards as compared to the risk that you are taking, then you would need to win most of your traders to keep your account positive, and you could lose it all in a single trade. 

Don’t Risk everything on a Single Trade

This largely talks about diversification of trade and Investment. Lots of experts have been harping on the need for Investors to diversity.

Diversification simply means you don't put all your eggs in one basket by risking it all on a single trade. You don't invest your hard-earned money in a single trade that you are not too sure about.

This important point needs to be taken into consideration because some investors fix their minds and emotions to a particular trade or position even when they are losing & the analysis says otherwise. 

New traders should have it in their minds that a continued period of profitability in a trending market does not make trade risk-free. A crash in the stock market or an uncertain economic event at a particular period could mar the previous gains you had recorded.

Diversification will make you overcome such unexpected investment challenges happening in an unfavorable market environment.

Another way you can avoid risking it all on a single trade is to consider deploying the method of 'One-Percent Rule'. The rule suggests that a wise investor should never put more than 1% of his capital or his trading account into a single trade or position. This strategy is known to be effective in minimizing losses.

Be Disciplined

As a trader, don't be too carried away by ambition of making money that you forget the risks.

It is very important to abide by simple trading rules such as keeping stop loss, knowing your exposure, hedging when necessary and avoiding over leveraging positions.

Following the simple rules will enhance your confidence and efficiency.

Consider Offsetting your Risks

Hedging can be used by investors as protection against risks in their investments. Hedging can be defined as the process of offsetting potential losses in an investment by taking another position.

Hedging strategy offers good trading advantages that you should not neglect. It protects your investments from being exposed to risks that can cause loss of value.

The losses you will encounter will be mitigated and be compensated for by gains in the opposite investment. Hedging means that you are aware of dangers that come with every investment and you choose not to be affected by any unfortunate market incident that can affect your finances.

It is just like getting car insurance in case of a car accident, the insurance policy would be responsible for at least part of the repair costs.

Keep Track of the News & Economic Events

Traders should take note that being on top of the news is now critical than ever, especially if you are a trader that is easily affected by world news.

If you are a Forex trader for example, you should be very current on news pertaining to the US Dollar because the movement of the USD affects other currencies.

For example, the US Dollar Strength in 2014 due to an expected interest rate hike caused many global currencies to weaken against the Dollar. Being aware of the news of expected hikes in Interest Rates by Fed is important for forex traders. 

Many relevant websites offer calendar & economic news which you can follow or subscribe to in order to stay informed on news that could affect your position. Many of those sites have newsletters, social media you can subscribe to and can be of immense help.

The global economy has become more interconnected, and not being aware of events could mean that you are taking risks without full information. Therefore, as a trader it is important to have information & your analysis on the Macro events, so you wouldn't be caught unawares.