How to Trade Stocks After Hours

how-to's Aug 31, 2020

Prior to 1991, US stock markets were only open between 9:30am and 4pm (EST) and that no-one was able to trade outside of those regular trading hours (RTH), also known as standard hours or day session.

“Beginning in mid-1999, increasing numbers of broker-dealers began offering their retail customers the opportunity to direct their orders to ECNs so that the orders would be eligible for execution after the regular session close. These developments promised retail investors some of the same flexibility in after- hours trading that institutions and professional traders have had for years.”

https://www.sec.gov/news/studies/ecnafter.htm

Those looking to trades stocks outside of RTH would have to either sit and wait, or engage in foreign markets, typically in Asia to take advantage of the time difference. This time restriction made it hard to bridge between full time work and being an at-home stock trader, which is why the extended or after-hours trading session makes the business of trading, much more viable, convenient and flexible. You can maintain a day job and come home with all the information that the computers, you left running while at work, have aggregated for you, so you are ready to make some after hours trades.

How It Works

If you’re a night owl, the idea of after-hours trading may sound ideal, but in practice, many exchanges and brokerage firms only offer two additional time slots. These are generally from 4pm to 8pm ET (this is the official definition of after-hours) and from 8am to 9:30am ET (this is known as premarket trading). The times fluctuate a little depending on who you use as your broker, and there are a very small number of firms (TD Ameritrade as an example) who give you 24/7 access to the market. Some Direct Market access brokers will allow pre-opening at 3:30am with early trading beginning at 4:00am ET. Liquid, widely traded stocks like AAPL often have activity beginning at that time, and especially if there has been a large move overnight in the SP500 Emini Futures Globex session.

Stocks can have very significant moves in the after-hours session as many companies release news and earnings results. Traders can’t assume that the next day’s pre-market or day session open prices will be in keeping with where prices left off in the after-hours. Investor sentiment can change, most stocks are sympathetic to moves in the SP500 futures and can be impacted by events and market moves in Asia and then again in Europe which is trading when US Markets open.

Trades must be placed through your broker to Electronic Communications Networks (ECNs) which matches buyers and sellers without the need for a traditional exchange. Limit orders are acceptable, but market orders are not permitted by most brokers in the pre-market or after-hours.

Various brokers can pose additional limitations on pre-market or after-hours, so please check into the restrictions before foraging into the pre-market or after-hours sessions.

Risks of Pre-Market and After Hours

While you may play a game of chess with your passive Limit Orders, they can be picked off by informed order flow (meaning someone knows something that you don’t). We call this order flow “toxic”.

If market or specific news hits, you will never be able to cancel your order in time to get out of harm’s way.

There is no price protection so if you enter a price that is incorrect (like many dollars away from where it is trading) and you get filled, the trade will stand as NBBO doesn’t apply in pre-market or after-hours sessions.

Many retail traders are drawn in to trade the “story stocks” which presents itself as opportunity, but does the trader know the whole story? Most likely not.

Pre & Post hours are when earnings, corporate actions and mergers are announced.

Due to the absence of liquidity and larger bid-ask spreads, there can be significant costs to exit a trade if you need to get out.

Benefits of Extended or After-Hours Trading

While restrictions, limitations and potential pitfalls can make after hours trading less inviting, there are some benefits to it that can make the risks worthwhile:

  • Immediate news reaction – we live in a global economy with a 24-hour news cycle which means that the stock market is always in play even when the doors are closed. A news event that happens outside of trading hours can have a big impact on the stock price of a company, and you can take advantages on these price fluctuations if you’re engaged in afterhours trading. It does require you to have your finger on the pulse of world news, the micro and macro influences, and over time develop the ability to interpret news and its impact on Sectors, Industries, Segments and the stocks. Not every piece of news will cause moves, and it’s important to evaluate whether it is new information, or “everyone” already knows. Remember, the market factors in everything that it knows or can anticipate…but is not very good at factoring in surprises. We actually recommend that you not necessarily trade the story stocks, but those that may lag and/or move in sympathy to the one that has the story. This offers you more control and ability to hedge if needed.
  • Price opportunities – volatility in after-hours trading can be higher, due to less market participants and less trading volumes. There are professionals involved in the after hours, so what liquidity that is available comes in two forms…those that are skilled and those that are not. Volatility and thin markets can be your friend if you are playing the game wisely and have honed your strategies specifically for after-hours trading. 
  • Pick your own schedule – learning how to make enough money trading stocks at home to make it into a full time profession can take a long time, and many amateur traders will start by balancing their full time job with out of hours work. Indeed, this flexibility makes pre-market and after-hours trading one of the best trading ideas for those wishing to interact live with the market while also working during the day. Now with many freelancers working their own hours and many industries shifting to employee’s work-at-home models, trading as a side hustle can be attractive.

Pre-Market and After-Hours Trading can be viewed as higher risk, potentially offering higher reward. Knowing how to trade the stocks that have news versus the boring cyclical stocks is dramatically different and requires you to be educated, informed and have a workflow that checks all the boxes. 

It’s essential to have access to a database that gives you significant insights into the behavior of stocks, as well as online education that teaches you what the professionals know and integrates using that data. This is where StockOdds services can increase your odds of success. It’s worth taking a StockOdds course to make sure you know what you’re up against and how to win. These online courses provide you with all the information, tips and tricks to help you learn how to trade stocks during regular trading hours or extended trading hours and further your skills as an at-home trader. 

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