Premarket Trading 101: How to Navigate the Markets before the Opening Bell
What is premarket trading? It should be a pretty standard concept; it’s an activity in the market before it opens, but why is there so much activity? What happens behind the scenes when the market isn’t open? And how can traders like yourself get in the action? Well, in this article, that’s what we are going to go over.
I do want it to be known that I don’t personally trade during the premarket, but I know many traders do and that there is a lot of interest surrounding the subject amongst newer traders. So, I want to get into the subject and detail what traders need to know. So that way, You can decide if trading during the premarket is suitable for you. Just know that trading during the premarket is a different game and that extensive research and disciplined will be required.
Premarket Trading: What Is It?
Regular trading hours for U.S. stock exchanges like the New York Stock Exchange (NYSE) are 9:30 am to 4:00 pm Eastern Standard Time (EST). However, electronic exchanges allow traders to buy and sell assets before the typical trading day.
While premarket trading is riskier, it can also give you niche trading opportunities. It is only recently that premarket trading has become popular. In 1991, after-market trading became possible on the New York Stock Exchange (NYSE). As a result, computerized foreign trading has become more common, and the exchanges have extended trading hours. Premarket trading hours in the United States are from 4:00 am EST to the usual market opening bell at 9:30 am EST.
Even after the stock market closes, trading can go on. After-hours trading occurs between 4:00 pm and 6:30 pm EST. However, on overseas exchanges, after-hours trading might continue until the following day. The availability of premarket trading doesn’t mean you should buy and sell stocks before the open. Frequently, retail traders get the “short end of the stick” when buying and selling premarket and can get filled at less optimal prices.
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Video Guide to Premarket Preparation
How does Premarket Trading Work?
This strategy involves purchasing and selling shares before the official market opens. The main goal is to buy and sell before the prices are high or low. It also allows you to act on after-hours news. This way, you can make profits before the market opens. Some of the most significant premarket events are earnings reports and court rulings. You can buy and sell shares of your preferred stock before the market opens.
There are a few differences between premarket trading and regular market sessions. In the ordinary trading session, broker-dealers must obtain the best price for their clients, and in premarket trading, they are not required to get the best price. This makes it more difficult for traders to make profits because they can get filled at bad prices due to the bid-ask spread (the difference between the selling and buying price) being very wide in premarket hours. A lack of liquidity means that the stock price will likely go haywire. Still, savvy traders can take advantage of these moves and turn a profit if they know how to trade it.
Why does stock move after hours?
The main reason stock prices move in after-hours trading is due to new information. Often, managers wait until after hours to announce the news. Bad news does not cause the price to drop nearly as much when the volume is less.
After hours, there is usually a lot of activity, and traders can take advantage of this. Of course, after-hours trading is more volatile than the stock market, so you should never use it as a reliable indicator of how the stock will perform in the next regular session.
Can I buy stocks during premarket hours?
Yes. However, to buy stocks before they’re listed on the market, you need to be a member of a brokerage that offers premarket trading. Premarket trading is available at many U.S. brokerages for many stocks. Some brokers offer premarket trading while others don’t.
This means you have to check with the broker about which type of trading you can do. You will need to execute the premarket or after-hours trade with a limit order and have “extended hours” selected, so the brokerage knows you want to get filled even if the market is closed.
Trading Platforms that allow Premarket Trading
Many platforms offer premarket trading for their customers; below, you will find some of the most popular platforms. But, it’s essential to conduct your research and find one that suits your needs. Every platform listed has its own governing policies, so choose carefully.
What’s the Difference between Regular Trading and Premarket Trading?
Unlike regular trading, which involves a human being, premarket trading is conducted using computerized systems. There are no market makers or specialists involved in premarket trading.
These systems match orders between buyers and sellers, and their prices are calculated before opening the market. Sometimes, traders will agree to buy stocks at higher prices and sell them for lower prices before the open. While the risk is lower, there are still risks involved.
Regular trading takes place after the market closes. Premarket trading is more convenient for traders because they can place trades at any time before the regular session begins. For example, premarket trading is more suitable for some traders because it allows them to respond to news events early in the day.
Pros of Premarket Trading
Premarket trading is a popular way to invest in stocks. Even just monitoring premarket action in a stock can indicate how the stock might react when the market opens and volume increases. The lack of volume in premarket hours results in greater volatility and risk, but it is also beneficial for retail traders as the price rises faster than the stock market.
Premarket price fluctuations can be more extreme because of the limited amount of activity. While the lower trading volume can cause larger spreads between bid and ask prices, premarket trading can give traders insight on how the stock might open. This is why premarket trading is popular among sophisticated investors and institutions. The low liquidity and low volumes lead to potentially big moves when news comes out. While this type of trading is riskier than regular hours, it allows more experienced investors to react to news items. They can ride earnings reactions when the news comes out instead of during the next regular session.
A significant advantage is the ability to trade during non-regular hours. Since this is a new trading session, the price movement of stocks is not capped at -10%. For example, a stock can increase more than 1,000% before being released. However, the risk associated with trading before the market opens is significant. In addition, volatility is higher during premarket trading than regular trading hours.
Cons of Premarket Trading
There are several disadvantages to premarket trading. The difference between how much you can sell a stock for versus how much you can buy it for, also known as the bid-ask spread, can differ widely from regular session bid-ask spreads. This is why many investors and traders prefer to use this trading method. However, this practice does have its drawbacks. While premarket traders tend to have more experience, several pros and cons can help traders determine which strategy will work best for them.
The most significant disadvantage of premarket trading is the higher risk due to lower trading volume and wider bid-ask spread. It’s important to remember that prices might be significantly more volatile during premarket trade. Because of the limited capacity, prices can rise and fall more quickly and steeply than otherwise. Furthermore, traders used to more moderate trading may suffer significant losses due to quick premarket price movements.
Even worse, the prices of equities traded during premarket hours may not indicate the costs of those stocks traded during regular market hours. Forecasting the market ahead of time can be deceiving. Even when stock prices appear to be climbing during after-hours trading, they may plummet dramatically at the start of the trading day.
Because fewer trades take place during premarket trading, it may be challenging to locate a buyer or seller. Because of this, executing deals and identifying pricing becomes more complicated. Treat pricing trends that emerge before the market opens with caution. Generally speaking, only the most experienced traders should attempt to trade before the start of regular market hours.
What to Consider Before Trading During Premarket Hours
To have a chance in this environment, you must be well-prepared. You need to learn the best ways to enter and exit trades. A good platform can help you do this easily, and it should also have tools that allow you to scan for earnings announcements and news stories. Before starting your premarket trading portfolio, check out news releases to be aware of what might affect the stock price.
Premarket hours are the most challenging times to trade, but many traders prefer it for the volatility. Before starting premarket trading, remember to consult a financial advisor. There are many risks and disadvantages to this method, so learn the characteristics of premarket trading before starting.
For experienced traders, premarket trading can be a lucrative opportunity to profit, but it is also significantly riskier than trading during regular business hours. Therefore, most traders prefer to observe rather than engage in premarket trading action.
Individual investors who trade before the market opens will almost certainly find themselves in direct conflict with professional investors who have more expertise. If you are still drawn to those early trading sessions, make sure to do your research and have a trading plan in place to trade outside regular trading hours.
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It is essential to find the best system for your circumstances and personality. Always be prepared and stay disciplined, no matter what strategy you use. It takes a lot of hard work and dedication to become a profitable trader; don’t give up. There are different ways to approach the market to trade successfully – you need to find what’s right for you!
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FAQs on Premarket Trading
A: Premarket hours are defined as any trading that occurs before regular market hours. But, typically it starts at 4:00 am and ends at 9:30 am EST.
A: It depends, there are certain stocks available for premarket trading but not all of them are available. It’s worth mentioning that options cannot be traded before the market opens. But, always check with your trading platform and ensure what their guidelines are.
A: A short answer would be: very important. Over the last 10 years, I’ve learned that what distinguishes successful traders from the 95% that fail is discipline.
A: Yes, traders are able to trade futures before the market opens, however, ensure with your trading platform for specific guidelines.
A: At Simpler Trading, we use indicators from 4 categories: volume, volatility, momentum, and trend.