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Extended-hours trading
Have you ever wondered how certain traders are active before and after traditional stock market hours? This is an introduction to extended-hours trading (EHT).
Trading in the financial markets doesn’t strictly adhere to the conventional hours of major exchanges, such as the New York Stock Exchange or NASDAQ. There exists an often overlooked aspect of trading that occurs outside the standard hours, known as extended hours trading.
This guide offers insight into the mechanisms and implications of investing outside of regular trading sessions. It helps you understand the nuances, consider the potential benefits and drawbacks, and arm yourself with information.
Trading in the financial markets doesn’t strictly adhere to the conventional hours of major exchanges, such as the New York Stock Exchange or NASDAQ. There exists an often overlooked aspect of trading that occurs outside the standard hours, known as extended hours trading.
This guide offers insight into the mechanisms and implications of investing outside of regular trading sessions. It helps you understand the nuances, consider the potential benefits and drawbacks, and arm yourself with information.
Big ideas
- Extended-hours trading includes sessions both before the market opens (pre-market) and after it closes (after-hours), providing additional time for traders to react to news and events.
- Due to lower trading volumes during extended hours, investors might experience increased volatility, leading to potential opportunities but also increased risks.
- Participation in extended hours trading is not universal; while it's accessible to both retail and institutional investors, the types of securities and trading conditions can vary widely.
What is extended-hours trading?
DEFINITION
Extended-hours trading, or EHT for short, refers to the transactions that take place either before the market opens (pre-market) or after it closes (after-hours).
Extended-hours trading occupies the time slots immediately before and after the traditional market hours, typically falling into two main categories: pre-market and after-hours trading.
It's an environment where financial transactions, especially stock trading, occur, often reflecting the market's immediate response to news or events unfolding outside the regular trading schedule.
It's an environment where financial transactions, especially stock trading, occur, often reflecting the market's immediate response to news or events unfolding outside the regular trading schedule.
A short explanation of extended-hours trading
This form of trading allows participants to react to corporate news, earnings reports, and other significant events that happen outside regular trading hours. It’s a landscape that provides additional time for market participants to respond to information and is particularly noted for its unique dynamics including, but not limited to, variations in liquidity and volatility.
To learn more about the specific characteristics of trading before the market opens and after it closes, check out our guide to Pre-market and After-hours trading.
To learn more about the specific characteristics of trading before the market opens and after it closes, check out our guide to Pre-market and After-hours trading.
When are the extended-hours trading sessions?
There are distinct sessions, each with its unique characteristics and dynamics.
Pre-market trading occurs in the early morning hours before the official opening of the stock market. It’s a time when early bird investors respond to overnight news and developments. However, it’s also marked by lower trading volumes, leading to potential price volatility and wider bid-ask spreads, which are essential factors for investors to consider.
After the closing bell, after-hours trading takes centre stage, providing an additional window for market participation. This session can be particularly active following the release of corporate earnings or significant economic indicators. Like pre-market trading, participants should be mindful of the typically lower liquidity.
After the closing bell, after-hours trading takes centre stage, providing an additional window for market participation. This session can be particularly active following the release of corporate earnings or significant economic indicators. Like pre-market trading, participants should be mindful of the typically lower liquidity.
How extended-hours trading works?
Extended-hours trading is facilitated through Electronic Communication Networks (ECNs), which connect potential buyers and sellers directly without the intermediary of traditional exchanges, which are closed.
These networks operate outside regular trading hours, thereby providing a platform for transactions in the pre-market and after-hours sessions. While having access is a significant advantage, it is generally a good idea to act more cautiously when liquidity is thinner.
These networks operate outside regular trading hours, thereby providing a platform for transactions in the pre-market and after-hours sessions. While having access is a significant advantage, it is generally a good idea to act more cautiously when liquidity is thinner.
Pros and cons of extended-hours trading
A brief comparison of extended-hours trading with regular trading hours
While regular trading hours are characterised by higher liquidity and tighter bid-ask spreads, extended hours trading often sees lower volumes. This can result in increased volatility, with securities potentially experiencing larger price fluctuations.
Additionally, not all stocks may be available to trade during these extended hours, and different rules and regulations can apply. It’s an environment that demands a heightened awareness of market dynamics, as price movements can be swift and unexpected in response to new information.
Additionally, not all stocks may be available to trade during these extended hours, and different rules and regulations can apply. It’s an environment that demands a heightened awareness of market dynamics, as price movements can be swift and unexpected in response to new information.
Overview of the advantages and disadvantages of extended-hours trading
The advantages of extended-hours trading often hinge on the ability to respond to real-time events and news that occur outside standard market hours. This immediacy can be pivotal for many traders.
Conversely, the disadvantages often centre around reduced liquidity, increased volatility, and wider bid-ask spreads, which can impact the efficiency of trades executed during these periods.
Conversely, the disadvantages often centre around reduced liquidity, increased volatility, and wider bid-ask spreads, which can impact the efficiency of trades executed during these periods.
Comparison of different pros and cons and their relevance to EHT
Factors | Pros | Cons |
Response to real-time events | - Immediate access to markets - Ability to adjust positions quickly - Enhanced flexibility in trading | - Potentially exaggerated price fluctuations - Possible overreactions to news |
Trading volume | - Opportunities in a less competitive environment | - Lower liquidity - Wider bid-ask spreads - Slower order execution |
Price fluctuations | - Potential to capitalise on rapid price movements | - Increased volatility - Higher risk due to rapid price changes - Unpredictable market behaviours |
How to get started with extended-hours trading?
Strategies for evaluating and selecting the right stocks for extended-hours trading
Selecting the right stocks involves a careful analysis of their historical performance during extended hours, their volatility levels, and whether there are specific news releases that are likely to cause significant price movements worth trying to capture.
Tips for getting started with extended-hours trading
The journey into extended-hours trading begins with choosing a suitable brokerage that offers this service. With Trading 212, you can invest during extended market hours and make use of fractional shares.
To understand fee structures, the availability of securities, and the operational dynamics during these hours, you can go through this article and contact us 24/7 for any remaining questions.
To understand fee structures, the availability of securities, and the operational dynamics during these hours, you can go through this article and contact us 24/7 for any remaining questions.
Common mistakes to avoid in extended-hours trading
Steering clear of impulsive decisions driven by rapid price movements is advisable at any time of the day, especially during extended hours. Balancing one’s approach, staying informed, and adhering to a well-structured risk management strategy is instrumental in navigating extended hours trading effectively.
Popular extended-hours trading strategies
The dynamics during these hours can significantly differ from regular trading periods, meaning certain strategies can work well while others are less effective.
1. Momentum trading
Momentum trading involves capitalising on stocks' short-term momentum, a strategy that can be particularly pronounced during extended hours when news and announcements often trigger rapid price movements.
In these scenarios, traders may seek to identify stocks experiencing significant movements, aiming to enter and exit positions within a relatively short timeframe to capture potential gains.
Common tactics include looking for stocks to break above or below multi-day highs or moving by multiple standard deviations of their usual daily price range.
In these scenarios, traders may seek to identify stocks experiencing significant movements, aiming to enter and exit positions within a relatively short timeframe to capture potential gains.
Common tactics include looking for stocks to break above or below multi-day highs or moving by multiple standard deviations of their usual daily price range.
2. News-based trading
News-based trading is another prevalent strategy in extended hours, where traders react to news releases and announcements made outside of standard market hours.
Information such as earnings reports, regulatory changes, or macroeconomic data can instigate immediate market reactions.
Given that a significant number of US companies announce their earnings results outside the standard trading hours, a substantial volume of trading activity is concentrated in the pre-market and after-hours sessions. This accentuates the importance of extended-hours trading, especially for those looking to respond to the volatility triggered by earnings announcements.
Traders employing this strategy aim to respond swiftly to news, interpreting its potential impact on stock prices before the market starts moving.
You can navigate through the Socials tab in the Trading 212 app to find a dedicated News section where investors discuss the hottest market updates:
Information such as earnings reports, regulatory changes, or macroeconomic data can instigate immediate market reactions.
Given that a significant number of US companies announce their earnings results outside the standard trading hours, a substantial volume of trading activity is concentrated in the pre-market and after-hours sessions. This accentuates the importance of extended-hours trading, especially for those looking to respond to the volatility triggered by earnings announcements.
Traders employing this strategy aim to respond swiftly to news, interpreting its potential impact on stock prices before the market starts moving.
You can navigate through the Socials tab in the Trading 212 app to find a dedicated News section where investors discuss the hottest market updates:
3. Risk management strategies
Risk management is a common motivation for trading during extended hours. This is because the elevated levels of volatility and potential price gaps can severely alter positions placed during regular hours.
Investors often employ strategies like setting stop-loss orders or limiting the size of positions to mitigate potential losses.
Investors often employ strategies like setting stop-loss orders or limiting the size of positions to mitigate potential losses.
Features to look for in a good extended-hours trading strategy
A comprehensive extended hours trading strategy should inherently factor in the pronounced volatility and liquidity constraints. Having mechanisms to manage rapid price movements and understanding the implications of wider bid-ask spreads are central to navigating this domain effectively. These features are not prescriptive but are highlighted to enhance awareness of the distinctive environment of extended-hours trading.
A robust risk management strategy for extended-hours trading should encompass elements like setting predefined entry and exit points, establishing firm stop-loss levels, and diversifying your portfolio to spread the associated risks.
A robust risk management strategy for extended-hours trading should encompass elements like setting predefined entry and exit points, establishing firm stop-loss levels, and diversifying your portfolio to spread the associated risks.
Recap
The article provides a comprehensive overview of extended-hours trading, covering its definition, distinct sessions, and strategies employed within this realm.
Extended-hours trading is a valuable tool for those who seek to capitalise on global opportunities. By understanding its dynamics, risks, and rewards, investors can make informed decisions and decide if extended-hours trading is the right fit for their strategy.
Extended-hours trading is a valuable tool for those who seek to capitalise on global opportunities. By understanding its dynamics, risks, and rewards, investors can make informed decisions and decide if extended-hours trading is the right fit for their strategy.
- Volatility: A measure of how much the price of an asset fluctuates over time.
- Liquidity: The ease with which an asset can be bought or sold without significantly affecting its price. Highly liquid markets allow for quick transactions, while low liquidity can make buying and selling more difficult.
- Bid-Ask Spreads: The difference between the price buyers are willing to pay (bid) and the price sellers are asking for (ask). Narrow spreads indicate high market efficiency, while wider spreads suggest lower liquidity.
- Stop-Loss Orders: An automatic order to sell an asset when it reaches a specified price, used to limit potential losses.
