Pre-market and After-hours Trading in the Stock Market: Peculiarities of Trading

Pre-market and After-hours Trading in the Stock Market: Peculiarities of Trading

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If you also ask yourself why the trading session yesterday closed at one price, and before the next one opens, the price changes — you were right to open this article. Before a trading session opens, a period called pre-market comes, and after the session closes, after-hours, a.k.a. after-market happens.

Trading in pre-market and after-hours became popular in 1991 when it became possible to use digital systems for trading in the stock market. Before that time, only large funds and corporations had access to a closed session.

Let us figure out what is pre-market and after-hours and whether it is worth trying to make money in these periods.

Stages of a trading day in the exchange

To get started, let us figure out what a trading day is comprised of. Normally, it is split into three stages:

  • Pre-market trading is a period before a trading session opens.
  • Trading session is the time when main trades take place.
  • After-hours trading is a period after the main session closes.

The exact length of each trading stage is set by exchanges themselves — the information is available on official websites. As an example, let us have a look at the work of NYSE:

  • Pre-market — 4:00-9:30 Eastern Daylight time, UTC -4.
  • Trading session — 9:30-16:00.
  • After-hours — 16:00-23:00.

Note that broker companies can give access to the Pre-market and After-hours and set their length at their own discretion.

Peculiarities of Pre-market and After-hours

Now let us have a look at the peculiarities of these unusual parts of the trading day, their advantages and drawbacks. Let us get started from the Pre-market:

Pre-market is a morning trading period when preliminary (limit) orders are placed in the market depth (Level2). Counter-trade orders at one price are executed immediately while all others get transferred to the trading session.

The aim of pre-market trading is to unload the opening of trades and give a chance to set the opening price of the instrument (the first price of buying and selling). The price forms by a certain algorithm that cannot be influenced by market players

After-hours trading is evening trading that takes place after the main session closes.

Its aim is to set an optimal closing price of all the instruments trading at this exchange. When after-hours closes, all non-executed orders are deleted.

Advantages of pre-market and after-hours trading:

  • An opportunity to open a trade at a better price: the trader can place a limit order at the price they need.
  • An opportunity to open a trade forecasting price movements after some news or reports are published. After trades open, the price might leap up high.
    In theory, major players can move the price in the direction the trader needs (though it cannot be predicted).
  • An opportunity to close the position you failed to close during the trading session.

Drawbacks of pre-market and after-hours trading

  • Major players can move the price in a direction opposite to that one the traders needs, entering the market by a large lot.
  • Low liquidity due to a small number of market players.
  • You cannot see prices and volumes of other traders' orders.
  • Increased volatility that might reach over 30% of the initial price of the asset.
  • Increased spreads that might reach over several thousands points.
  • Order execution lags: an order gets executed only if there is a matching one in the opposite direction.
  • A gap forms at the start of the trading session.

Those who know some arithmetic have already noticed that pre-market and after-hours trading has more drawbacks and risks than advantages. This is true. Check explanations below.

Examples of trading in pre-market and after-hours

To trade before or after the trading session opens or closes traders use news and companies' reports open to the public as well as insider information.

An example of pre-market trading

A 123 company at 8:30 a.m. New York time published a quarterly report that shows an increase in the net profit by 123%, and that dividend payments will be increased several times.

We can suppose that 123 shares might grow in price after the trading session opens. A trader that has this information can buy the shares in the pre-market and make a profit almost immediately in case of a gap.

An example of trading in after-hours

Market players that have some insider information think that the morning report of 123 will be positive, and after the report will be published the shares might grow significantly. After the session closes the trader might place an order to buy several lots at a lower price, and if the quotations do grow, they will make a profit right after trading opens.

The reverse side of the medal is as follows: if the information does not prove accurate, and 123 shares fall, the trader might lose a part of the capital.

Trading strategies used in pre-market and after-hours trading can be called risky, and I advise beginners against using them.

Also, the very fact of having some insider information does not always help in trading. Always mind the fact that searching for insider information might turn out to be illegal.

Closing thoughts

Trading before and after the main trading session is risky for individual traders. An order placed deliberately or by mistake might be executed at a bad price, which will lead to losses. Try to stay away from trading out of the main session.

I would add that pre-market and after-hours trading suits major players who hide their orders from other players and make them visible only after the execution (dark liquidity). This increases the risk of the price going in an unprofitable direction.

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