When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Extended hours trading for day traders
Experienced day traders can find new opportunities by accessing extended hours trading outside of regular exchange hours. But additional risks in pre-market and after-hours trading create new pitfalls to avoid.
Big ideas
- Extended hours create compelling opportunities to continue your own trading momentum or capture events that affect stocks, but liquidity risk means your trades may not work out as planned.
- You must develop a defined edge to be a successful day trader. For example, many use after-hours momentum as an edge or strategically time their trades during the day.
- Basic risk management principles are easy to understand, but many often fail to follow them.
Day trading basics
Traditional long-term investing advice includes:
- Just buy and hold
- Time in the market beats timing the market
- Only invest in companies you understand
Sound familiar? A 60/40 portfolio may be the cornerstone of a long-term investment strategy and financial planning, but you’re likely still wondering: is day trading full-time worth it?
What is day trading?
Trading and investing are more accessible than ever because of improved technology, dollar-based trading through fractional shares, and a push for commission-free investing that is available from Trading 212.
In past decades, day trading was nearly impossible for average consumers - slow home computing and steep fees meant institutional investors with the infrastructure and capital comprised almost the whole "day trading" segment of the market.
But what is day trading? At its most fundamental, day trading is precisely as it sounds - buying and selling securities (like a stock, options, futures, and other assets) within the same trading day. This differs from standard buy-and-hold investing, and if you buy a stock to sell the next day, you aren’t day trading either - the latter is usually called swing trading and describes holding the asset over one or more overnight periods.
In past decades, day trading was nearly impossible for average consumers - slow home computing and steep fees meant institutional investors with the infrastructure and capital comprised almost the whole "day trading" segment of the market.
But what is day trading? At its most fundamental, day trading is precisely as it sounds - buying and selling securities (like a stock, options, futures, and other assets) within the same trading day. This differs from standard buy-and-hold investing, and if you buy a stock to sell the next day, you aren’t day trading either - the latter is usually called swing trading and describes holding the asset over one or more overnight periods.
By now, you’re likely wondering how we’re defining the day in day trading and whether buying or selling pre-market or after-hours counts as a day trade. The answers may surprise you, and we’ll cover the full extent of extended hours trading once we dive into some of the specifics of day trading.
What is the pattern day trader rule?
A primary concern for beginner day traders is the pattern day trading rule and determining whether it affects them. Please note the PDT rules applies only to US residents.
Pattern Day Trader (PDT) and Minimum Equity Requirements
Per the US Securities and Exchange Commission, a pattern day trader “executes four or more ’day trades’ within five business days“.
Remember, a day trade is when you buy and sell the same security within a single day’s trading window. Traders marked as pattern day traders must have a minimum balance in their account and maintain that balance - this is why you need $25,000 to day trade. If you don’t meet the minimum equity requirement and make four-day trades within five days, your brokerage is liable to prevent further day trades for 90 days.
Remember, a day trade is when you buy and sell the same security within a single day’s trading window. Traders marked as pattern day traders must have a minimum balance in their account and maintain that balance - this is why you need $25,000 to day trade. If you don’t meet the minimum equity requirement and make four-day trades within five days, your brokerage is liable to prevent further day trades for 90 days.
The Financial Industry Regulatory Authority (FINRA) is a US-based corporation that dictates most brokerages and peripheral platforms in America. FINRA sets the PDT rule, and all brokerages or platforms under FINRA’s authority must comply - but what if your brokerage platform isn’t US-based and thus not subject to FINRA?
Sometimes, non-US brokerages comply with FINRA regulations to manage their margin requirements, but the PDT doesn’t automatically apply to all non-US brokerages.
Sometimes, non-US brokerages comply with FINRA regulations to manage their margin requirements, but the PDT doesn’t automatically apply to all non-US brokerages.
Unofficial rules: best practices when day trading
Although regulations like the PDT rule are strict for US-based day traders but don’t apply to others, a few “rules” are standard across the entire market segment. These are not hard-and-fast mandates but rather a series of “best practices” recommended for day traders - especially those new to trading or transitioning to full-time day trading.
If you’re considering day trading, you’d be well-advised to remember 1720 - no, not the year Parliament passed the Bubble Act in an early form of regulating corporate stocks. Instead, remember each number as percentage-based rules: 1%, 7%, and 20% rules.
What is the 1% rule in stock trading?
The 1% rule helps day traders manage risk. To prevent overexcitement and an eventual catastrophic comedown. The 1% rule in stock trading dictates that day traders don’t stake more than 1% of their account value on a single trade. Let's say that you want to invest in Apple stocks from the UK or internationally, and the price is running up. If your portfolio’s total value is 50,000 British pounds, the 1% rule suggests your maximum AAPL day trade is no more than £500.
Unfortunately, early success makes many new day traders overconfident in their skills. They quickly ramp a single stake well beyond 1% of their account value, eventually wiping out their account and stopping short their dreams of full-time day trading. Stick to the rule, though, especially as you’re learning the ropes of the market, day trading, and even the functions of your brokerage platform. If your maximum trade risk is set to 1% consistently, you’d have to have a very long losing streak to blow the entire account.
Unfortunately, early success makes many new day traders overconfident in their skills. They quickly ramp a single stake well beyond 1% of their account value, eventually wiping out their account and stopping short their dreams of full-time day trading. Stick to the rule, though, especially as you’re learning the ropes of the market, day trading, and even the functions of your brokerage platform. If your maximum trade risk is set to 1% consistently, you’d have to have a very long losing streak to blow the entire account.
What is the 7% rule for stocks?
The 7% rule is another risk management parameter for day traders. Essentially, it helps day traders stop “chasing losses,” or holding onto a loser hoping it’ll reverse. Oftentimes newer traders fall prey to this trap and will even revert to swing trading a stock while crossing their fingers that the stock price goes up at night.
The 7% rule caps your losses at 7% of the trade’s value. If the price or play is net negative 7% from your open, close the position and limit your losses. Furthermore, many use the 7% rule as a guideline for the percentage gain at which they sell a stock - if a trade runs up 7% within a day, it’s best to lock in gains and exit while you’re ahead.
The 7% rule caps your losses at 7% of the trade’s value. If the price or play is net negative 7% from your open, close the position and limit your losses. Furthermore, many use the 7% rule as a guideline for the percentage gain at which they sell a stock - if a trade runs up 7% within a day, it’s best to lock in gains and exit while you’re ahead.
The 20% rule in stocks
Our final percentage-based rule, the 20% rule for day traders, is more of a guiding principle than a dictate. The 20% rule helps all investors, particularly day traders, maintain a healthy perspective as they experience the market’s ups, downs, and general volatility.
Based on the Pareto Principle and a parallel to tail risk management, the 20% rule suggests that 80% of your portfolio growth is attributable to 20% of your trades. Remember this if you have an apparent losing streak, as you only have to “hit” one-out-of-five times over a long period to be successful according to the 20% rule.
The corollary to the 20% rule is that 80% of your losses may be attributable to 20% of your trades if you don’t follow risk management rules. Let the 1% and 7% rules guide your decisions, and reap the rewards of the 20%.
Based on the Pareto Principle and a parallel to tail risk management, the 20% rule suggests that 80% of your portfolio growth is attributable to 20% of your trades. Remember this if you have an apparent losing streak, as you only have to “hit” one-out-of-five times over a long period to be successful according to the 20% rule.
The corollary to the 20% rule is that 80% of your losses may be attributable to 20% of your trades if you don’t follow risk management rules. Let the 1% and 7% rules guide your decisions, and reap the rewards of the 20%.
Remember 1720
✍️ The 1% Rule: don’t risk more than 1% of your account value on a single trade.
✍️ The 7% Rule: if your trade loses 7% of the opening cost, exit immediately.
✍️ The 20% Rule: no matter how much a day trader makes daily, 20% of your trades likely account for 80% of your income, so maintain perspective if you’re initially struggling.
✍️ The 7% Rule: if your trade loses 7% of the opening cost, exit immediately.
✍️ The 20% Rule: no matter how much a day trader makes daily, 20% of your trades likely account for 80% of your income, so maintain perspective if you’re initially struggling.
Timing your trades
Day traders live and die based on their edge. A day trading edge is the trading advantage, no matter how slight, that tilts the scales in your favour over time. For example, a day trader who on average wins $1 for every $1 they lose on a trade but wins 51% of their trades still has a small statistical edge that can be profitable over time.
Many traders see daily timing as a gold standard of edge trading because it’s easily identified without a lot of statistical analysis and backtesting. Let’s look at some common themes you can use as your edge throughout a trading day and some additional risk management techniques.
Many traders see daily timing as a gold standard of edge trading because it’s easily identified without a lot of statistical analysis and backtesting. Let’s look at some common themes you can use as your edge throughout a trading day and some additional risk management techniques.
Daily trading limits
Exuberant new day traders often think, “How many hours can I trade in a day?” rather than the more appropriate “How many hours should I trade in a day?” Some assets, like futures, CFDs, forex, and (of course) crypto, trade nearly 24/7 and tempt traders with a constant call. Even standard stocks trade well past the typical daily trading window if you consider extended hours trading (covered soon!).
Despite the availability and accessibility of constant trading, veteran day traders usually insist that you quit while you’re ahead (or behind) as a new day trader. The longer you trade in a day, the more subject you are to common fallacies that throw off your game, like the Gambler’s Fallacy or sunk cost decision-making. In short, try to cap your daily trading window, whether you define that as a set sequence of hours daily or trigger-based, like achieving a set gain or loss.
Despite the availability and accessibility of constant trading, veteran day traders usually insist that you quit while you’re ahead (or behind) as a new day trader. The longer you trade in a day, the more subject you are to common fallacies that throw off your game, like the Gambler’s Fallacy or sunk cost decision-making. In short, try to cap your daily trading window, whether you define that as a set sequence of hours daily or trigger-based, like achieving a set gain or loss.
Late-night moves
Many day traders swear by momentum trading, which is when you jump onto a fast-moving stock to ride the trend while it lasts. Many momentum traders try to finish the day’s work early by capturing significant after-hours moves when the market opens, hoping the stock will retain its momentum long enough to lock in some gains.
This begs the question - why do stocks go up at night? While after-hours trading contributes, the momentum and massive moves overnight are due more to institutional trade settlement. For example, a large hedge fund may work out a deal with a wealth manager with a significant stake in stocks they want, like AAPL or AMZN. They determine a price together in what’s called a dark pool and bypass the public market, so they don’t disrupt general trading with a huge transaction. Therefore, while it appears that after-hours trading for Amazon or after-hours trading for Apple is moving the market, the huge upside and downside moves are often more attributed to transaction settlements.
This begs the question - why do stocks go up at night? While after-hours trading contributes, the momentum and massive moves overnight are due more to institutional trade settlement. For example, a large hedge fund may work out a deal with a wealth manager with a significant stake in stocks they want, like AAPL or AMZN. They determine a price together in what’s called a dark pool and bypass the public market, so they don’t disrupt general trading with a huge transaction. Therefore, while it appears that after-hours trading for Amazon or after-hours trading for Apple is moving the market, the huge upside and downside moves are often more attributed to transaction settlements.
Time of day to buy stocks: Morning, noon, or night?
A critical question, if you want to buy low and sell high, is, “What time of day is the cheapest to buy stocks?” By finding a consistent time of day when stocks are cheaper, you may be able to develop a predictable edge that’s easy to execute by pulling the trigger on your screened stocks at the same time daily.
While not guaranteed, many day traders follow the 10 AM rule in stocks (New York (EST) in this case). Remember that the US stock market opens at 9.30 AM EST and that we know the opening window is often the most volatile, partially because of momentum where prices rise overnight, or stocks drop after hours. Using these two guideposts, you can wait patiently for the first 10, 20, or 30 minutes to see whether an after-hours trend will hold or reverse.
By 10 AM, it’s usually evident whether the momentum will continue or reverse, meaning that the 10 AM rule for stocks helps determine whether a position is worth entering and whether to go long or short the security. By knowing a broad best time to buy shares, usually around 10 AM for this style of momentum trading from after-hours moves, you might be able to develop a predictable trading edge over time if you couple the strategy with quality screeners and signals.
While not guaranteed, many day traders follow the 10 AM rule in stocks (New York (EST) in this case). Remember that the US stock market opens at 9.30 AM EST and that we know the opening window is often the most volatile, partially because of momentum where prices rise overnight, or stocks drop after hours. Using these two guideposts, you can wait patiently for the first 10, 20, or 30 minutes to see whether an after-hours trend will hold or reverse.
By 10 AM, it’s usually evident whether the momentum will continue or reverse, meaning that the 10 AM rule for stocks helps determine whether a position is worth entering and whether to go long or short the security. By knowing a broad best time to buy shares, usually around 10 AM for this style of momentum trading from after-hours moves, you might be able to develop a predictable trading edge over time if you couple the strategy with quality screeners and signals.
The basics of extended hours trading
CHEAT SHEET
What are the extended hours trading times?
🕘 Pre-Market Trading: 09:00 - 14:30 GMT (04:00 - 09:30 EST)
🕝 Market open: 14:30 GMT (09:30 EST)
🕘 Market close: 21:00 GMT (16:00 EST)
🕐 After-Hours Trading: 21:00 - 01:00 GMT (16:00 - 20:00 EST)
🕘 Pre-Market Trading: 09:00 - 14:30 GMT (04:00 - 09:30 EST)
🕝 Market open: 14:30 GMT (09:30 EST)
🕘 Market close: 21:00 GMT (16:00 EST)
🕐 After-Hours Trading: 21:00 - 01:00 GMT (16:00 - 20:00 EST)
Finally, extended hours trading - an opportunity for day traders to swap stocks 24/7, right?
Not so fast. Extended hours trading is available through select brokerages, so not everybody is allowed to trade after-hours and often use different settlement and exchange processing firms than are used during regular trading hours. Because not all brokerages offer the option and there’s generally less volume, extended hours trading is very different from the regular market windows.
There are two supplemental extended hours trading windows for the United States:
Not so fast. Extended hours trading is available through select brokerages, so not everybody is allowed to trade after-hours and often use different settlement and exchange processing firms than are used during regular trading hours. Because not all brokerages offer the option and there’s generally less volume, extended hours trading is very different from the regular market windows.
There are two supplemental extended hours trading windows for the United States:
- Pre-Market Trading: 09:00 - 14:30 GMT (04:00 - 09:30 EST)
- After-Hours Trading: 21:00 - 0:100 GMT (16:00 - 20:00 EST)
Both let you trade in extended hours, but how does extended trading work? Simply put, many intermediaries (called market makers that provide liquidity) aren’t active in extended hours trading. Depending on your order type, your brokerage seeks to match you with a buyer or seller directly. This means you can buy stocks at night or sell stock in extended hours, but only if there’s another market participant on the other side of the trade.
Pros and cons of extended trading
Extended hours are great for catching last-minute news, company earnings, or continuing momentum from the regular trading day before after-hours trading ends. Despite the clear advantages of after-hours trading, there is one critical downside that creates several extended-hour trading risks.
Lacking liquidity after hours
We’ve referenced liquidity; the term refers to the availability of enough buyers and sellers in addition to market makers to trade stocks actively.
Because extended hours trading has far fewer participants, liquidity is less. This means you may not get the price for your stock sale that you prefer, or your cost basis is far higher than it would be during a typical trading day. The bid/ask spread can be much higher in extended hours trading. Lost liquidity is also what makes after-hours trading so volatile. Because the spreads are so wide, many brokerages force clients to use limit orders rather than marker orders when trading in extended hours.
Remember, a market order is when you tell your brokerage to buy or sell immediately at whatever price the other side of the trade wants. The market price is usually close to what you see on the screen for liquid assets during regular trading periods, as the spread isn’t wide.
Limit orders, in contrast, are when you tell your platform to buy or sell at a specific price. If a buyer or seller doesn’t match your price, your order won’t be filled, and you’ll have to walk your limit order up or down in extended hours to ensure a fill.
Because extended hours trading has far fewer participants, liquidity is less. This means you may not get the price for your stock sale that you prefer, or your cost basis is far higher than it would be during a typical trading day. The bid/ask spread can be much higher in extended hours trading. Lost liquidity is also what makes after-hours trading so volatile. Because the spreads are so wide, many brokerages force clients to use limit orders rather than marker orders when trading in extended hours.
Remember, a market order is when you tell your brokerage to buy or sell immediately at whatever price the other side of the trade wants. The market price is usually close to what you see on the screen for liquid assets during regular trading periods, as the spread isn’t wide.
Limit orders, in contrast, are when you tell your platform to buy or sell at a specific price. If a buyer or seller doesn’t match your price, your order won’t be filled, and you’ll have to walk your limit order up or down in extended hours to ensure a fill.
Recap
Extended hours trading offers a new opportunity for day traders. But is it better to trade at night or during the day? Extended hours trading is beneficial if there is important news or earnings movement overnight or before the marker opens. Still, the relative “thinness” of the extended hours participants may mean you can’t trade as efficiently or effectively as you would during the day. Ultimately, you must decide for yourself but remember to be patient, be calm, and manage risk by making a plan and sticking to it.
Day trading is an enjoyable but stressful career path. New entrants can get started through low-cost brokerages but many fail to follow simple risk management rules like 1720 or cannot develop an edge to profit from. Good risk management is often the difference between success and failure for a day trader following even the most successful trading strategy.
Day trading is an enjoyable but stressful career path. New entrants can get started through low-cost brokerages but many fail to follow simple risk management rules like 1720 or cannot develop an edge to profit from. Good risk management is often the difference between success and failure for a day trader following even the most successful trading strategy.
FAQ
Q: Why is after-hours trading so volatile?
After-hours trading is volatile for many reasons. If a significant news event happens or a company is affected by good or bad earnings, the stock price might rise or fall significantly after hours. In general, though, reduced liquidity in extended hours trading makes price swings more common as the bid/ask spreads are wider.
Q: Does after-hours affect the opening price?
After-hours action definitely affects the opening price. As an example of extended hours trading, consider a firm that blows earnings out of the water after the market closes. If enough after-hours traders provide sufficient liquidity to push the price up, the price remains elevated when the market opens. After-hours trading is a critical component in momentum trading strategies.
Q: Can I buy after hours and sell pre-market?
If your brokerage allows extended hours trading, you can buy after-hours and sell pre-market - assuming buyers and sellers match your limit order on the other end of the transaction, but you are less assured of getting the buy and sell prices you want because of lower liquidity.
Q: Does selling stock after hours count as a day trade?
Yes. Many US day traders or others affected by PDT rules think they can subvert FINRA when the market technically closes. But FINRA defines a day trade as a business day, not by market hours, so buying pre-marker or during a trading day and selling after-hours counts as a day trade.
- 60/40 Portfolio: A traditional investment strategy that allocates 60% to stocks for growth and 40% to bonds for stability. It aims to balance risk and reward, making it a popular choice for long-term investors.
- 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.
- Liquidity Risk: The risk that an asset cannot be quickly bought or sold without significantly affecting its price.
