Lessons from the Pros


Risks and Rewards of After-Hours Trading

People often ask if there are opportunities to trade the stock markets during the extended-hours sessions.  This includes after-hours trading between 4:00 and 8:00 pm ET, and pre-market trading between 7:00 and 9:28 am ET. While there may be a few advantages, the risks involved with trading outside of the “Regular Hours” of the markets can far outweigh the likelihood of profiting.

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After-hours trading allows investors to react to corporate earnings reports that are typically released after market close. If you like what you see, you can place an order immediately rather than waiting until 9:30 the next trading day. Similarly, pre-market trading gives you the opportunity to adjust your positions based on news such the U.S. Employment Report, which is released at 8:30 am ET on the first Friday of every month. In addition, extending the trading day can seem like a benefit to those who have a full-time job or other obligations that make it inconvenient to trade between market hours of 9:30 am and 4 pm ET.

The risks, on the other hand, are so significant that most brokerages require customers to sign an Electronic Communication Network (ECN) user agreement and discuss it with a representative before they can begin extended-hours trading. From our perspective at Online Trading Academy, the biggest risk is that only limit orders are allowed. You cannot set stops, which are a fundamental element of our trading strategy because we want to maximize our profit potential while minimizing downside risk.

This situation is exacerbated by reduced liquidity during extended-hours traded. The vast majority of trades are executed during normal trading hours, which means there are more traders interested in the stocks you want to buy or sell. After-hours you may set a limit and never see it executed because the price does not reach that level or you cannot find someone to take that trade. Reduced trading volume also contributes to wider spreads in bid-ask prices which can impact your profitability.

After Hours Trading: Example and Risks

To better understand the risks of extended-market trading, here’s an example of after-hours market activity when Apple released a quarterly earnings report in late 2015. As you can see, there was significant price movement after the market closed.

Which markets trade after hours?

A chart showing an example of after hours trading risks

It would seem at first glance that there were some opportunities for generating quick income.  But let’s take a closer look at the price action that occurred during and after the release.  The following chart is set to show a new candle every ten seconds.

What hours is the stock market open?

Just before the news Apple’s price fluctuated several dollars per share downward and back to $114.  Traders who put in orders to short the breakdown would have been filled.  If they were lucky enough to have a close order at $111 they may have gotten out for a quick profit.  There was not a demand zone visible to tell you to exit at $111 though.

If those traders stayed in the trade, they were shocked once the news came out and prices shot to $118 per share.  This was a more likely outcome for many.  The patient trader could have entered a long about two minutes after the news and the shakeout for a nice profit.  It should be noted that this is not a regular pattern nor is it a wise trading strategy.

Remember, market orders are not available for use in the after hours session.  That means that you cannot place protective stops on your trades even if you wanted to.

Now let’s take a look at liquidity.  When we enter a position, we want liquidity, (high volume), so that we can exit the trade where we want with ease.  Low volume makes it difficult to get out at favorable prices.

Is there more risk trading after hours?

The pre-market trading activity is often a reaction from the market makers to news and trading that occurred in the futures markets.  Since the ETF’s and the futures follow the same index, they need to maintain a certain relationship.  The futures markets are open nearly 24 hours a day and can move significantly when influenced by Asian and European trading.  When the stock market is closed and the futures move, the market makers will push prices when the pre-market opens so stocks and ETF’s will be trading closer to where the futures are.

after hours futures trading

At Online Trading Academy, we teach solid strategies that deal with trading the reaction after the markets have opened for regular trading hours.  This also includes dealing with gaps.  By trading this way, there are more protections against loss and a much greater chance for profiting.

Trading Forex after hours

That’s why we think it is best to stay away from trading stocks outside of the regular-hours session.  If you want to trade before 9:30am or after 4:00pm Eastern, learn how to trade the futures or Forex markets.  That is where you will find the liquidity you need to increase your odds and grow your capital!

Brandon Wendell – bwendell@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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