It is almost common sense for novice traders to familiarize themselves with the opening hours of stock exchanges before they start trading. However, not every beginner has yet discovered the opportunities of trading when the market is closed.
Read on to find out everything you need to know about pre-market and after-hours trading.
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During pre- and post-market trading sessions, a trader gets the opportunity to trade securities and other assets outside of standard trading hours.
There isn’t a single centralized exchange in the world that doesn’t have set business hours. Take the NYSE and NASDAQ as examples. The two stock exchanges are usually open from 9:30 am to 4:00 pm in New York.
Nevertheless, traders can trade during the pre-market session before the markets open. When standard business hours are over, traders can choose to trade during the post-market trading session.
Why trade during pre- and post-market sessions?
You may be wondering why traders choose to trade during pre- and post-market sessions when there are standard business hours, when they can open as many trades as they want.
The first trade outside of usual business hours was recorded in 1999. Electronic trading platforms had just been created at that time, making it possible to buy and sell securities electronically.
The invention of electronic payment platforms was revolutionary because investors no longer had to be physically inside the exchange building to place an order.
One of the main goals for investors who trade during pre- and post-market sessions is to react as quickly as possible to important news from companies that interest them.
If a company announces its financial results, it is almost immediately reflected in the value of its shares, as well as in the sentiment of investors.
When do pre- and post-market trading take place?
Pre-market trading usually begins at 8:00 am and lasts until 9:15 am ET. The after-hours session takes place between 4:15 pm and 8 pm ET.
Who can trade in the pre- and post-market sessions?
Not so long ago, only the most affluent clients and institutional investors could trade during the extended trading sessions. Yet, the introduction of electronic trading platforms has turned the tables.
Today, any trader can take advantage of pre- and post-market trading. However, it is necessary to take into account that many brokers charge their clients an additional fee for the service.
What are the risks of pre- and post-market trading?
Of course, pre-market and after-hours trading offer traders and investors additional opportunities, but it is also essential to recognize the risks that come along and develop a risk management strategy accordingly.
Below are the main risks of pre- and post-market trading that you may expose yourself to.
Low liquidity
Unlike trading during standard working hours, very few buyers and sellers are left on the market, resulting in low liquidity.
Wide spreads
Since trading volumes drop sharply during pre- and post-market sessions, there can be a large gap between ask and bid prices. Traders may encounter issues with filling their orders at the exact price they request.
Fierce competition
You may think that the competition will be less intense because most traders are off the market, but that’s far from reality.
Many prominent institutional investors with solid capital have access to pre- and post-market trading. They have resources inaccessible to average traders, making them a lot more likely to profit from the market.
Trading during pre-market and after-hours sessions means you will be competing with these powerful institutional investors.
Negative influence from market-moving news
Many market-moving reports, for example, the US jobs report, are released before the market opens. The publication of such reports can lead to unexpected price movements, which are especially dangerous when combined with high volatility and low liquidity.
Advantages of pre- and post-market trading
The disadvantages we have listed above can significantly and negatively affect a trader’s results when trading outside standard hours.
Yet, it is beyond doubt that pre-market and after-hours trading can potentially bring you plenty of benefits, or else it would not have attracted so much attention from large institutional investors.
Below are the potential benefits that trading outside business hours can bring you:
Flexible trading
Just because a trader does not manage to make transactions during regular trading hours, it does not mean his day is wasted.
With pre-market and after-hours trading, your trading hours are extended. You can still open trades when the markets are closed, giving you more flexibility.
Take advantage of industry news to make the right trading decisions
News can dramatically change the values of instruments traded on an exchange. Being able to access industry news and events before the market opens can help you optimize when to open and close your trades, increasing your chance of profiting.
The use of technical analysis
Trading outside standard hours gives you the opportunity to analyze the charts of the stocks you are interested in advance. You can hence decide on your trades before the stock market opens.
What are the best assets for pre- and post-market trading?
Forex trading is a great way to get started in pre- and post-market trading. Unlike the stock market, the forex market is open 24 hours.
This means you can trade the majority of currency pairs outside the usual active trading hours, including the weekends. Popular forex pairs that you may consider involve EUR/USD, GBP/USD and USD/CAD.
When it comes to stock trading during the pre-market and after-hours sessions, the list of instruments available to you are significantly shorter since the major trading floors are closed.
Conclusion
It is totally up to the trader whether to trade during the regular hours or the pre- or post-market sessions.
Trading outside the usual business hours gives you possibilities that you cannot find when trading during regular hours.
You will also be the first to have access to financial news and reports that are published after the trading floors close.
Nevertheless, pre- and post-market trading are popular among institutional traders, whom average traders will find difficult to compete with.
You will also have to handle high volatility and low liquidity.
If you are prepared to overcome the obstacles, pre- and post-market trading can be a great way for you to gain exposure to the financial markets.
FAQs
Should I trade pre- or post-market or is it better to wait for the exchanges to open?
It depends on your goals and level of risk tolerance.
Many investors do not risk trading outside market hours and prefer to trade only when the market is open, but some experienced traders find pre-and post-market trading attractive.
Pre- and post-market trading often gives traders room to get rid of unprofitable deals and replace them with new positions, increasing their chance of profiting.
Before deciding to trade outside market hours or not, we recommend implementing a risk management strategy to ensure that your risks will not be outweighing your potential profit.
Is pre- and post-market trading too risky?
While pre-market and after-hours trading may be risky for beginners, many sophisticated investors find that the drawbacks of wide spreads and low trading volumes are compromised by the advantages of trading outside regular hours.
Is it possible to trade outside market hours with market orders?
No, market orders cannot be used during pre-market and after-hours trading. Most brokers only accept limit orders, which protect investors against sudden price drops in the assets they are trading.
Vigorous price fluctuations can occur due to the wide spreads and low trading volumes that characterize pre- and post-market trading.
