Trading and investing in stock markets have made people very wealthy and yet others have had bad experiences with stock markets and are intimidated at trading on financial markets.
Most millionaires in Africa and indeed the world over are in countries where stock markets are active. I have seen many young and not so young people who have made a lot of money by trading at financial markets.
The key is to understand how to trade responsibly and avoid trading or investing carelessly. It is, therefore, essential to spend time and/or money and educate yourself on how to invest or trade in stocks.
People who have no time or money to spend can still make a lot of money trading at stock exchanges by using professional money managers.
People ask me whether to sell or buy based on the price action of their share. First of all you invest or trade to make money. So make sure that whatever action you take will make you money. I will address this by using Price which is one of the main indicators Technical Analysts use when making trading decisions.
Before you invest or trade, decide your time frame. Do you want to invest long term, medium term or short term? Also choose stocks and sectors that are performing well.
Prices are moving targets - they go up and down, hourly, daily, weekly and so on. They are a result of action taken by human beings who want to make money and by others who are trying to minimise their loss. Humans are acting on their best judgment but history has shown that these actions are influenced by fear or greed. Technical Analysts advise that it is possible to make a lot of money by controlling our emotions as much as possible and make money from people who are selling at low price out of fear and then sell to people who enter the market late and are buying at a very high price.
Let us illustrate the above point of human behaviour by looking at the price chart below of the Kenya Commercial Bank (KCB) for the past twelve months - March 2011 to March 2012.
It would have been better to use charts of companies on Rwanda Stock Exchange but could not do so because of potential conflict of interest but also could not find a one year chart to illustrate the point.
KCB is one of the best performing stocks among its peers at the Nairobi Stock Exchange.
Source : www.mystocks.co.ke
Having decided the stock to buy then one would have to identify the best entry point. No matter whether you are a short term or long term investor, you want to trade in the direction that will make you most money.
The chart shows that KCB prices were going up in March 11 to May 11 and in fact the highest price reached KSH 26.75 in late April. Look at the Relative Strength Index (RSI), in the chart above, is around 70% zone which would not be a buy signal point and yet because of human behaviour some people were still taking entry positions (buying) instead of exit or taking bearish positions. I will discuss these other signs/ indicators in subsequent articles. Prices started to decline and traded flat until end of May 11 and then declined further up to October 11 when the price reached 14.70 ; a decline of around 47%. Note that KCB prices started to go up again in late October 11 and are currently trading above KSH 20.00
October 11 was the best entry month when KCB stock prices were at the lowest point. See also RSI signal coming below 30% which is a confirmation to take entry positions. This was not the time to exist and yet some people were still selling out of fear.
Note that a person who has invested long term will be less concerned with these price fluctuations. Markets swing back and forth excessively and investing long term kind of smoothens out these swings.
I hope this example will help you not to lose sleep over price fluctuations but will help you make lots of money.
Price action is a major indicator but there are several indicators and charts that would help tilt the odds in your favour.
In the KCB chart above, you can see two of them: Volume and Relative Strength Index (RSI). The chart could also have been improved by putting in trend lines – Resistance and support levels. We will discuss other charts and indicators in subsequent articles.
Till next time.
James Gatera is MD Bank of Kigali.