Trading in large movements during after-hours is the wild west of stock trading. When trading volume is low and fewer traders are involved in buying stocks, movements can be extreme and rapid. This means there’s potential for significant profit but also great risk, and, in some cases, it can be very difficult to gauge that risk.
Definition of After-Hours Trading
The regular trading hours for the stock market in the United States are between 9:30 AM and 4:00 PM Eastern Time. This is when the New York Stock Exchange (NYSE) and NASDAQ experience the most trading activity, as banks and institutions are also open during this time. It is also the period when opening and closing prices are quoted (on websites and in newspapers). The price at 9:30 AM is the opening price, and the price at 4:00 PM is the closing price.
Reasons for Stock Movements After Hours
After the market closes at 4 PM, there may still be traders looking to enter or exit positions, keeping trading active for an hour or more after the official close. This can occur in stocks that trade millions of shares daily. These high-volume stocks may have after-hours activity every day. There may not be any trades happening after hours in many stocks, especially those with low volume during regular sessions.
News events, such as earnings reports, are typically released after hours. Earnings can cause significant price movements and are a key metric used by institutions and investors to decide whether they want to buy or sell a stock.
When earnings are released after hours, traders often try to capitalize on the information (hoping to get a head start on most traders and investors who won’t trade until the next day). This leads to swift and large movements in the stock price. These fluctuations also attract day traders looking to get in and out of trades for quick profits.
Ultimately, stocks move after hours for the same reason they move during regular sessions—the buying and selling of people.
It’s important to note that just because people can trade after hours, it doesn’t mean that after-hours trading occurs in all stocks. If there is little interest in a particular stock, there may be no trades after hours (remember, for a trade to occur, there must be a buyer and a seller willing to trade at the same price). While earnings in large companies often result in plenty of after-hours activity, earnings in a relatively unknown small company may not attract any after-hours trades at all.
How to Find Big Stock Movements After Hours
For traders interested in joining trades after earnings, or day traders looking to trade earnings volatility, there are a few places to search.
Companies often announce in advance when they will release earnings (and whether they will be after-hours). All earnings are listed on Yahoo! Finance.
Traders can also monitor stocks that are moving after hours by checking the MarketWatch After Hours Screener or the NASDAQ After Hours Most Active list.
Provides
Most trading and charting platforms also offer a list of active stocks during pre-market and after hours. Check with your broker and/or platform provider to see if this feature is available to you.
As mentioned above, earnings in well-known companies typically provide the best trading opportunities. It requires price movement and volume, so if no one is interested in the stock, there won’t be volume (although some traders may cause price movement).
Advantages and Disadvantages of After-Hours Trading
There is one main advantage of after-hours trading, which is: less competition
With fewer active traders, individuals can take advantage of favorable prices that may not be available once more liquidity comes back into the market.
Unfortunately, this advantage also has a downside. Less competition means: less volume of erratic price movements
While it is possible to get some favorable prices and trades after hours, you can also be on the losing side of that trade (you might be the one providing a good price to someone else). With large price fluctuations and irregular volume, if you find yourself on the wrong side of the movement, it can be devastating. There may be a lot of volume in the stock overall, but not necessarily at the price you wish to enter or exit.
Another disadvantage is that what looks like an easy trade on the chart might not be so in reality. The attached chart shows a direct earnings release right after the bell. In the first minute after the release, the price rose by more than $2.75, but only on a volume of 10,000 shares. This means that very few people were able to buy that stock (or cover short positions). In the next minute, the price rose by more than $1.50, and 14,000 shares changed hands. In the following minute, the price rose by more than $2.15 on 27,000 shares. While this may seem like decent volume, with a host of traders and institutions trying to buy very few shares at over $6.50, it is hard to secure a piece of the pie.
As the stock price begins to stabilize around 4:15 PM (16:15 on the chart), more traders can participate and increase the volume. Even though much of the movement has already occurred by 4:15 PM, there is still enough movement for trades. Between 4:15 PM and 5 PM, stocks cover a range of over $0.80.
The downside here is that large movements are hard to capture. The upside is that there is usually an opportunity to make some trades once the initial chaos settles down and volume remains (or increases).
How to Trade in After-Hours
Some traders choose to develop specific strategies for after-hours trading or events driven by news, but usually, the after-hours strategies used are similar to those employed during regular trading hours.
Traders may choose to use a news-related strategy or a trend-following strategy. While the strategic guidelines would be similar for after-hours trading and during regular trading hours, traders should consider the increased spreads, decreased volume, and large price movements when trading in after-hours. These factors can make stop losses ineffective, leading to increased risks of significant losses. For this reason, one should consider reducing the position size (from what they are accustomed to trading during regular hours) if trading in after-hours.
Conclusion
Final Thoughts on After-Hours Trading
In the U.S. stock market, after-hours trading occurs between 4 PM and 8 PM. While trades can be placed during this time, it does not mean that all stocks have transactions occurring in after-hours. In fact, most stocks do not. After 4 PM, most stocks are abandoned, with no one willing to buy or sell near the day’s closing price.
Stocks that trade millions of shares during the regular session may see some activity after the market closes.
Earnings can cause significant price movements and attract many traders (volume) to stocks in after-hours. But again, not all stocks will have enough volume to justify trading in the after-market hours.
Use strategies similar to those you utilize during the day, but pay particular attention to the potential for wider spreads, lower volume, and significant price movements. Adjust the position size to compensate.
Source: https://www.thebalancemoney.com/how-to-trade-the-after-market-movers-4148243
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