Pre-Market v.s. Regular Hours: What You Need to Know
I’ll just put it out there: Pre-market trading can get a lot more complicated than just waiting for regular market hours.
For one thing, there are different limits and might be different fees associated with pre-market trading, depending on your broker.
For another, there’s a higher level of volatility and certain risks associated with pre-market trading, simply because there aren’t as many checks and balances (presence of market movers, volume, etc).
Trading during market hours is obviously ideal because this is when you typically see the most activity and get a better idea of what’s going on with the stock by charting its movement.
At the same time, looking at what’s happening before the market opens can sometimes provide you with trading opportunities.
By taking the time to focus on pre-market movers, you can have a detailed trading plan ready early in the day. This means that by the time the market opens, you can potentially have a distinct advantage because you’ve already mapped out some potential trades.
Difference Between Pre-Market and After-Hours Trading
Basically, the difference is just what it sounds like.
The pre-market trading session occurs in the morning hours before the markets open.
After-hours trading occurs during the hours after the markets close, usually 4–8 p.m.
Once again, check with your broker to see the exact hours available to you.
Like some pre-market broker restrictions, after-hours trading may be subject to some limits and potentially a different fee schedule. Bottom line: Do what the SEC suggests and read all disclosure documents before proceeding.
Is one is safer than the other? Not necessarily. Both pre-and post-market trading can be illiquid, making for potentially wide spreads and volatility.
Pre-Market Trading Example
Let’s take a hypothetical look at why you might decide to try pre-market trading.
For example: Say you consider $25 the strike zone for a particular stock, and it drops to $20 in the pre-market hours. It could be right back at or above $25 when the market re-opens.
And suppose, for example, that you’ve also caught wind of a positive catalyst, like a big, juicy news item or a stellar earnings report. In this case, you might buy in the pre-market session in order to help lock in that price.
Pre-Market Trading Techniques
Curious about testing the waters yourself? Here are some important things to consider and look at if you decide you want to make pre-market trades.
Earnings season and its resulting earnings breakouts make for some of the most important times of year for stock movement.
These are the times of year when companies release their quarterly earnings reports, and commences shortly after the close of the quarter. So, earnings season happens in January, April, July, and October.
Earnings season(s) can be a huge catalyst for stock movement, particularly if a stock has overshot or undershot analyst expectations.
If you catch whiff of the earnings report or even rumors of the earnings report, this information could be a newsworthy item that might spike pre-market trading.
According to Business Dictionary, economic indicators are “Key statistics that indicate the direction of an economy.”
There are a few key types of economic indicators, including:
- Leading indicators: these might include big contracts, a change in the formation of a business, or the share price.
- Coincident indicators: these might include GDR (Gross Domestic Product), retail sales, and the employment rate.
- Lagging indicators: these might include GNP (Gross National Product), interest rates, or the consumer price index. They are called “lagging” because they are only obvious in hindsight after related activity in the economy.
They can also be big drivers of the price action during pre-market hours. Many economic releases are issued at about 8:30 a.m., which is one hour before the markets open. This means that there can be a big reaction to this data that can move prices and affect them for the day.
For example, the Bureau of Labor Statistics (BLS) releases the Employment Situation Summary (which I explain in this post) at 8:30 a.m. This can have a big effect on the stock market, in terms of the GDR, retailer stocks, and so on.
Looking at the analyst numbers based on these factors can help you decide whether the movement is potentially worthy of a pre-market trade.
News can move … the market, that is. Pre-market trading can be a way to get your edge as a trader, jumping in on the stock in reaction to news releases.
However, this comes with a caveat. The low volume in the pre-market can give a false indication of the worth of the stock, so you might not get an accurate-enough idea of the price.
For this reason, the news has to be REALLY strong to potentially warrant pre-market trading.
E-mini Futures Cues
E-mini futures are futures which are electronically traded on the CME (Chicago Mercantile Exchange). They represent a small portion of a futures contract value.
After being introduced on the Chicago Mercantile Exchange (CME) in 1997, the E-mini quickly became a success because it made futures trading accessible to a wide variety of traders. Today, E-mini contracts can be traded on a variety of indexes, including the NASDAQ 100 and the S&P 500.
But here’s what matters in the pre-market session: the E-mini S&P 500 trades 24 hours a day. This futures market can often give signs of how the regular market might go throughout the day, so it’s sometimes like getting a preview.
Since the futures market is closely followed during pre-market hours, this could provide trading opportunities. To learn more about futures, check out this post — it offers a great education on E-Mini and futures market.
Watch the Spread
Mind the spread! In the pre-market, the volume and liquidity is limited, which makes bid-ask spreads bigger than usual.
Wait, what’s an ask spread?
A spread is the difference between the bid price and the ask price.
The spread is based on supply (aka “float”), demand, and the trading activity of the stock.
So since you’re removing the latter two from the circulation in pre-market trading, the former will likely be more pronounced.
If you think you’re ready to test the waters — or even if you’re still on the fence, I have 9 handy tips to help you get your feet wet.
Let’s take a little break. Then in our next issue, I’ll share with you my secret pre-market trading tips to get your on your way to success…
— Tim Sykes
Editor, Penny Stock Millionaires