What is After Hours Trading?
After hours trading is the activity of making trades after the U.S. equities markets close at 4:00 pm EST. This is also called extended hours and post-market trading. The after hours session begins at 4:01 pm EST. to 7:59 pm EST. ECNs close at 8 pm EST. until 4:01am EST. for the pre-market session.
Who Can Trade After Hours?
Most traders with online brokerage accounts are permitted to trade after hours. Since there are no market makers or specialists, all trading activity is handled through ECNs. Therefore, a direct-access broker is required to route orders to the ECNs like ARCA, INET, BATS and EDGX. All orders must be placed as limit orders since there are no market order capabilities.
What To Look Out For
After hours trading comes with a lot of risk, however, there are opportunities that emerge predominantly during earnings season. Companies that release earnings reports in the after hours can generate huge volatility in reaction to earnings results and guidance. Since all trades are done through ECNs, the thinner liquidity enables extremely large price movements. Many companies release their earnings after 4pm EST. accompanied by an evening conference call at 5:00 pm EST. Earnings guidance and the question and answering session during the call can evoke even more activity. The action tends to slow down by 7:00 pm EST. as the after hours session comes to a close at 8:00 PM EST.
After hours trading is most notable for the lack of liquidity, which causes very large price moves and large spreads. Thin liquidity equates to wider spreads, which can cause a lot of slippage if chasing the inside asks and bids. Market orders are prohibited, so limit orders can be placed both invisibly and with reserve/iceberg orders where the share size can be camouflaged with 100 share bid/asks that may contain large limit orders below.
Additional Trading Fees
Trading through ECNS incur pass-through fees when taking liquidity, such as buying on the ask price and selling on the bid price. Individual brokers may have additional fees involved, so it’s best to check those.
After Hours Trading Tips
Know The Difference Between After Hours and Regular Market Hours Trading
After hours can get traders in early during heavy volume price reaction to news. The high volatility provides opportunities to grab very large price moves. On the flipside, the losses can spiral out of control just as quickly. It’s very important to control the leverage and sizing because of this. Since there are no market makers or specialists, like regular market hours trading, there can be a lot of slippage getting filled.
The big point moves in the after hours can be very tempting for traders. Be aware this is an illusion meant to suck you into the game. After hours should not be a routine part of your trading day. It must be only an exception when you are intimately familiar with the underlying stock and the catalyst that’s causing big volume.
Be Aware of The Catalysts
The only reason to trade after hours is when catalysts emerge after the market close causing gapper/dumpers. These are stocks that spike or drop in price in reaction to news catalysts including earnings report, FDA decisions, court rulings and rumors. These are usually the only stocks that have action and subsequently opportunities worth trading. It is important not to get involved if the spreads are too wide and volume is too light. Make sure you know what catalyst is causing the price action.
Follow The Action
Only trade stocks with big volume and liquidity in the after hours. You can usually find these stocks through reliable news feeds and on the ticker on CNBC and other financial news networks. Always run potential stocks through your charts and align any trades with your methodology. Be aware when the volume starts to tail off and reign in your trading activity when action starts to slow.
Have After Hours Charting
It would naturally make sense to have after hours charting capabilities. This depends on your trading/charting platform. Don’t trade blindly without charts in the pre-market. It’s like going into a war without a map of the battlefield.
Use Limit Orders
This almost goes without saying, since there are no market order capabilities after hours. Take advantage of the wider spreads with hidden and reserve order to split the spreads. Using a direct-access online broker is very important, since you have more control of the routing to select. Always check to see if your broker has hidden/reserve ordering capabilities.
After Hours Action May Not Be Indicative Of The Morning Action
Often times the action in the after hours can completely reverse after the opening bell the next morning. This can happen due to analyst reactions, rumors, short squeezes and sentiment reversal. Therefore, it’s important to end the after hours session in cash without taking the risk of a sentiment reversal overnight. You can only control what is in front of you. When the ECNs close at 8 PM EST. it is virtually a trading halt that re-opens the next morning. Taking overnight exposure like this requires having a game plan that offsets event risk with smaller position sizes.