How Does After-Hours Trading Work?
After-hours trading is the trading of stocks after the regular session has ended at 4 pm. After-hours trading goes from 4:00 - 6:30 on the major U.S. exchanges. This activity was originally open to the wealthy and large institutions. However ,with the advent of the Internet, and Electronic Communications Networks (ECNs), the everyday trader now has the ability to post after-hours trades through their broker. Many times large investors take on these after-hour positions, because they are aware of some pending news and are quite certain that the stock will move in their favor. Most retail traders believe that some pending news or earnings release set for the next day will generate a move, so they will enter positions as well. Sad thing is, this is often a form of gambling and not truly investing. If you are a trader contemplating after-hours trading, here are a few tips for you before you get started.
Must Use Limit Orders
Most online-brokers will required you to enter limit orders when attempting to put on new positions. The problem with this is that the spreads after-hours often open up, and if you place the limit order out there, you have no shot of being filled at a better price. Also, advanced orders like trailing stops, and stop market orders are not available as well. So, the majority of the order execution is left up to you the trader.
Huge Bid/Ask Spreads
After-hours the spreads for stocks open up drastically. A $50 stock for example will have a spread of $50.18 by $50.46. What are you to do in this situation? Can you honestly buy the stock at $50.46? Well of course you can, but you better know some pending news, or have a very long time horizon for the trade, as you could be down over a half of a percent the second you execute the trade. Large Bid/Ask spreads are a breeding ground for pain. If you are a trader that finds yourself often getting emotional about each and every trade you are in, large spreads are not for you.
Light volume is not a good thing for active traders. The key to the game is being able to get in and out of positions as quickly as possible. After-hours trading generally has lighter volume than during the regular session. What will often happen is a huge volume spike on the news release, then the volume will dry up dramatically. So, you are not only faced with a large discrepancy in the bid/ask spread, but you are now faced with light volume trading. Are you beginning to catch my drift?
So we've discussed the large bid/ask spreads and then the light volume. What do you think these two factors lead to? Well I hope you guessed it right, but crazy price movements. You will often see stocks rally and drop a number of points in a matter of seconds, not minutes. In summary, make sure you have your head on straight before you get in the game of trading stocks after-hours.