Premarket trading

What is premarket trading anyways? How does it work? What about after hours trading?

I will give you a simple definition of what it is all about and why you might want to stay clear from it, at least in the beginning.

Stocks listed on the NASDAQ can actually be traded before and after the regular trading hours that are 9:30AM to 4PM EST.

Trading outside of these hours is called premarket trading and after hours trading.

It’s important to know that stocks are traded on ECN’s only.

Some of them offer up to 12 hours of trading from 8AM to 8PM. Island is by far the most active ECN.

What many people don’t know is that even NYSE and AMEX stocks are traded outside of the regular trading hours. They are traded only after hours on the lnstinet (INCA) network.

Be careful when trading outside of the regular market sessions since there is often not much liquidity and stock prices can rise and fall rather fast.

Also, you will often notice that bid and ask quotes are crossed. Usually that is not possible, because if buyers are willing to pay more than sellers, there should be trades made. In other words it would seem one could buy at a lower price then the actual best BID! Obviously, this is not the case…Why?

Because Market makers are not required to honor their displayed quotes outside of the regular market hours. They are only required to start refreshing their quotes 10 minutes before the market open.

The quotes displayed thru ECN’s are “real” and you can trade with every one of them. If you want to know the exact price the stock is currently trading for please look at your time and sales information (T&S), which is usually displayed on the right side of the level 2 box.

In premarket trading, I set my software to only display the ECN’s in the level 2 box, which gives me a much clearer picture

I know a lot of traders who actually specialize in pre market and after hours trading; mostly pre market…

Usually they look for a pre market announcement which provokes the stock to be traded actively, creating the gaps we sometime see at the open. Once the market opens they take advantage of the pre 10AM volatility to maximize their profit either by continuing with the trend if it continues or going the pother way while the gaps is filled before 10 AM…

It makes for very exciting trading that lasts 1 or 2 hours but this is where most of the moves occur anyway. After that these traders are free until the next session … They usually have a good golf handicap ….

Why doesn’t every traders practice premarket trading and/or after hours trading?

The volatility of this period makes for very difficult trading conditions and you need to have nerves of steel and trading capital big enough to be able to sustain sizable losses considering that when you lose you can lose big. Of course when you win you also win big but imagine if you have 5-6 trades that go wrong in a row and you’re average loss per trades was 5-10%. It can be crippling if you don’t have enough capital…

Usually they trade significant amounts of shares to make it worth their while so if all you have is 10000$ and you lose 40% after 3-4 sessions you are left with 6000$ vs. one who has 100000$ and trades 10K then loses 40%. He is left with 96000$…

Pretty obvious but worth thinking about before you consider these high risk trades

Now I suggest we look at Unusual prices