After Hours Stock Trading Strategy
After hours stock trading strategies rely closely to news releases, offering scalpers enough room for profits, while having some unique risks.
Pre market and after hours stock trading used to be available only for major institutional players and high-net worth individuals, while all other investors could only trade during regular trading hours - that is between from 9:30 a.m. to 4:00 p.m. ET on the New York Stock Exchange and the Nasdaq Stock Market. But that changed by the end of the last century with the rise of Electronic Communications Networks (ECNs). Today also individual investor can gain access to the after hours stock trading.
Before you decide to trade pre market or after hours, you need to educate yourself about the differences between regular and extended trading hours, especially the risks. You should consult your broker and read any disclosure documents on this option.
What Are Electronic Communications Networks (ECNs)?
Electronic communications networks (ECNs) are electronic trading venues, which allow individual investors to trade after hours. In theory, any investor who makes arrangements to access an electronic communications networks can trade in the after hours marketplace. In real-life, to participate in after hours stock trading you must be a customer of a brokerage firm that either has an ECN of its own or access to one or more ECNs, like Island, Market XT, Archipelago and Instinet amongst others. It is important to understand that some ECNs are regulated exchanges, others are sidelines of broker-dealers, and others are unregulated.
Extended Hours For Stock Trading
As said, also private investors can trade today in pre market session or after market close. Pre market stock trading hours are typically from 8:00 a.m. till 9:15 a.m. ET for NASDAQ and NYSE stocks, (using NYSE Arca ECN you can enter and execute orders even from 4:00 a.m. to 9:30 a.m. ET), while after hours stock trading can be done from 4.00 p.m. till 8:00 p.m. on the NYSE and till 6:30 p.m. on NASDAQ.
Can Pre-Market And After-Hours Stock Trading Be Profitable?
Some traders use special event driven momentum trading strategy and trade mostly during extended hours and they are profitable. But this type of trading is very specific, and strategy must be learned and perfected.
Extended Hours Stock Trading Strategy
Get Yourself A Reliable News Source
Pre market and after hours stock trading is closely connected with world financial news trading strategy, so you should read article covering this topic very carefully. The thing is that majority of companies all over the world release their quarterly earnings results before market opens or immediately after market is closed and your goal is to catch the move after the release is made. As you will note with news trading, and it is the same with after hours stock trading, to be able to take advantage of the price moves that occur during news release and extended hours trading you must have a reliable live news source so you can catch the move at the beginning.
Prepare An "All-Scenario" Plan
Get ready for the pre market or after hours trading with financial and earning calendar; you must know ahead of time when to expect market to move significantly. Check carefully analyst expectations with specific news release. You should work out different scenarios ahead of the news release, based on different results. This can help you by already having a plan ahead of time without having to make a quick decision that was not thought out.
Catch The Move And Clear The Trading Account
If you are trading pre market or after hours, you should catch quick moves and then exit the position. Holding overnight and hoping for more gains seems a bit greedy and should not be part of extended-hours trading plan, especially if you are trading big positions. In this case you can have had a good sleep that night and come back in the stock market trading the next morning with no problems. Remember, having a good exit plan ahead of time will help to keep you out of trouble if and when the time comes.
Pre Market And After Hours Stock Trading Risks
While pre market and after hours stock trading presents investing opportunities, there are also the following risks to consider:
Inability to See or Act Upon Quotes
Some firms only allow investors to view and trade quotes from the one trading system the firm uses for after hours trading. You should check with your broker if your system shows and routes orders to others ECNs. If you are limited to the quotes within one system, you may not be able to complete a trade, even with a willing investor, at a different trading system.
Lack of Liquidity
Liquidity refers to your ability to convert stock into cash, which depends on the existence of buyers and sellers and how easy it is to complete a trade. During after hours stock trading, there may be less trading volume for some stocks, making it more difficult to execute some of your trades. Some stocks may not trade at all during extended hours.
Larger Quote Spreads
Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.
Greater Price Volatility
For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours. News stories announced after hours may have greater impacts on stock prices.
The prices of some stocks traded during the after hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day.
Bias Toward Limit Orders
Many electronic trading systems currently accept only limit orders, where you must enter a price at which you would like your order executed. A limit order ensures you will not pay more than the price you entered or sell for less. If the market moves away from your price, your order will not be executed.
Competition with Professional Traders
Many of the after hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.
As with online trading, you may encounter during after hours delays or failures in getting your order executed, including orders to cancel or change your trades. For some after hours trades, your order will be routed from your brokerage firm to an electronic trading system. If a computer problem exists at your firm, this may prevent or delay your order from reaching the system. If you encounter significant delays, you should call your broker to determine the extent of the problem and what you can to get your order executed.
Things To Be Checked With Your Broker
Since pre market and after hours stock trading has many specifics as seen above, you should check a few things with your broker before you start trading this way:
- Check with your broker to see whether orders not executed during the after hours trading session will be cancelled or whether they will be automatically entered when regular trading hours begin.
- Similarly, find out if an order you placed during regular hours will carry over to after hours trading.
- Most online brokerage firms charge the same price for regular and after hours trading. However, some firms impose a premium in all cases for limit orders, which are recommended for after hours trading.
- Check if your broker is limiting you with the maximum quantity on a single order in after-market stock trading.
You should read our article about factors to watch when choosing the best online stock broker.
Written by: Goran Dolenc
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