9 Tips for the Early Bird Trader
If you’re thinking of trying pre-market trading, you need to make sure you first learn a ton about the process.
These guidelines have been helpful for my trading.
I’ve broken them down into my top nine tips if you feel like you’re ready to get started…
1. Understand the Market’s Mood and Trade Appropriately
Listen to the market, and trade based on what it’s telling you right now.
After-hours and pre-market sessions are mostly made up of professionals. This is largely because it’s not a very hospitable place.
There’s low volume and high volatility galore — and it can be extremely difficult to determine entry and exit points.
For example: One big buy could have a major impact on the stock’s price. So you have to be able to consider different things and be appropriate. This means you must typically approach the pre-market differently than you would during regular trading hours.
2. Unless There’s News, Wait for Regular Market Hours
Liquidity issues, bigger spreads, fewer players in the game … if pre-market trading were a party, it wouldn’t necessarily be the most in-demand fiesta.
For many, there’s not much of a benefit to trading in the pre-market hours. This is part of the reason why the pre-market often begins only at 8 a.m. This is when the volume often gains momentum and we can begin to see more direct results of the news (or rumored news).
Even in such situations, it might still be wise to wait until the market opens or slightly after. However, pre-market trading exists for a reason, and while it’s not always reliable, it’s sometimes possible to gain profits during this time.
3. Use Direct Access Brokers
Pre-market trading is executed through something called ECN exchanges.
ECNs, or Electric Communications Networks, are a type of alternative trading system (ATS) wherein listed stocks and exchange traded products can be traded.
To be able to trade on the ECN exchange, you are required to register with the SEC as a broker-dealer.
This means that in order to trade in the pre-market, you need to either be registered, or you need to work with one of these ECN subscribers or direct access brokers. This can ensure that orders are routed right to the ECN.
4. Think About Sympathy Sell-Offs and Your Trading Peers
Watch out for sympathy sell-offs. This is a phenomenon that happens when a company experiences a sell-off based on something that’s happening in the industry.
For instance, one stock might experience a reduced price because of a bad news catalyst. This could, in turn, cause the stock of its competitors to go down as well, simply because of the association with the industry.
This is definitely something to watch for and be aware of in pre-market trading. Watch what traders are doing and saying to help you get an idea of whether it’s really a hot stock, or just hype.
5. Make Use of Pre-Market Charting
Just like during regular trading hours, reviewing charts is vital to helping you analyze pre-market trades.
First, you’ll want to learn who the pre-market movers are. Then, you can filter them by volume. This can help you decide where to focus your attention.
But be warned: Just because a stock has movement doesn’t necessarily mean you should trade. It should be used more as an indicator, acting as just one piece of your research in figuring out if a stock is worth your time and effort.
Even more so than during regular hours, during pre-market times, it’s important consider outside elements such as news. Since a big catalyst is usually what precipitates a pre-market trade, be sure to look at that before formulating your trading plan.
6. Have an Effective Trading Technique in Place
It’s always important to have a trading plan in place, as it can help keep impulses and emotions out of the process.
However, with pre-market trading, it’s possibly even more important. The stakes can be higher, which means that the effect of impulsive or emotional decisions can result in bigger losses.
Trading plans should also consider indicators of price and momentum, and check support and resistance levels.
This is important: Be sure have stops in place. Don’t become a cautionary tale. Make entry and exit decisions, have a plan, and stick to it.
7. Avoid Over-leveraging
It can be tempting to stock up on stocks in the pre-market. But this has blown up many an account for traders, so I strongly caution against it.
Be very cautious with your margin, and avoid trading in the quantities that you might handle during regular trading hours. The pre-market is different. If and when momentum shifts, the liquidity can change in an instant, because the market isn’t humming along to keep prices stable.
8. Look for Forced Liquidations on Margin Calls
It’s not uncommon for a broker to make adjustments to the margin requirements based on a stock’s volatility.
This can land traders in potentially bad positions when the market opens. If they’re overleveraged and then the margin changes, they might face an unexpected liquidation. Don’t let it happen to you.
9. Watch for Stock Halts
A trading halt is a temporary halt on trading, either in one exchange or across the board in several exchanges at once.
Usually, trading halts happen for a few reasons, including the anticipation of news announcements, regulatory issues, or due to the need to correct imbalances in orders. If a trading halt occurs, orders may be canceled.
Because of this, it’s always important to check if a stock is emerging from a halt. Certain stocks can commonly halt in the pre-market. For example: If you get stuck in a halt, you may not know the status when it opens back up.
It’s well worth the small amount of time required to find out if there’s a halt, especially if the news or catalyst isn’t strong.
The Bottom Line
Pre-market trading can create opportunities for traders, but it comes with an assertive amount of risk.
Given the many unknowns with pre-market trading, it’s not generally a technique that’s suitable for new traders.
However, this doesn’t mean that you can’t still potentially benefit from pre-market trading. The knowledge you can gain about the market during this time can help you form your trading plan ahead of the curve — so when the market opens, you’re ready to rock.
— Tim Sykes
Editor, Penny Stock Millionaires