After Hours Trading: Tips for Traders on How the After Hours Market Works

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After-hours trading isn’t for the faint of heart.

If you’re just starting out as a stock trader, one of the first things you need to know is when to trade. Exchanges are the same as any other marketplace: they have opening and closing hours so traders know when to show up and when to leave.

For instance, if you show up at Best Buy at 2 a.m., banging on the door won’t allow you to purchase a new laptop. You have to show up during business hours. The same is true for the stock market — to an extent.

Historically, the stock exchanges were open only during normal business hours in the U.S., unless you were a high-net-worth individual or an institutional investor. But the digital era is the thing of the masses, and this hungry age of electronic communications has pushed the exchanges to offer everyone the opportunity for trading both pre-market and after hours.

There’s a good reason that the market isn’t open 24/7: You only get true sentiment when everyone’s trading at the same time, more or less.

After-hours trading, then, is the combination of after-hours and pre-market trading — everything that occurs in the short time period before the market opens and right after it closes.

What Is After Hours Trading?

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By Pixabay/CC0 BY

The New York Stock Exchange (NYSE) opens at:

  • 9:30 a.m. Eastern time, Monday through Friday
  • and closes at 4 p.m.

But pre-market trading allows you to start as early as 4 a.m., and after-hours trading lets you go until 6:30 p.m.

If you’re trading at 7 a.m. or at 5:30 p.m., you’re involved in after-hours trading.

There’s nothing wrong with it, but it comes with rules as well as a few drawbacks. It’s important to understand the risks as well as the potential benefits of participating in after-hours trading.

After Hours Trading: Extended Opportunities

Those of you who are familiar with me and my work know that I’m all about opportunities.

So why does after-hours trading offer us more opportunities?

Because buying stocks outside the regular trading hours can grant us the chance to get in early on swings.

It’s riskier, yes, but it can also be more rewarding.

If you’re paying attention, you could take advantage of earnings winners like these, for example, before the rest of the trading world is awake.

Maybe it’s something you stumble across in the early morning hours, or when everyone else is having dinner with the family.

Perhaps it’s about making some quick cash on a short sell, or a surprise reaction to earnings. Or shorting a stock on relevant news in extended trade and then buying it back in the morning when it’s down below the original buy price.

Trading after hours can give us advantages in these cases.

It also represents risk, if you’re not paying attention to the right things.

Take this scenario for example:

  • Analysts make reports on the evening news that often air before after-hours trading ends.
  • Some traders hear news that might influence a stock, then run to their computers and execute trades.
  • Bad move. Because lots of other people are doing the same thing.
  • I prefer to take a wait-and-see position. And if I get an opportunity to strike without undue influence, I take it.

Consider all the people who lost big on Chipotle in 2015. It’s hard to feel bad for them because they weren’t paying attention — but if you’re just starting out, let this be a cautionary tale, because after hours trading doesn’t suffer fools.

Rumors that Chipotle stock had hit its bottom and would start rebounding right before an earnings call caused stocks to shoot up 10 percent, but only a minute later it fell 50 points.

Riding this roller coaster is tricky, but the lesson is: Don’t act on the first media report you read.

If there’s an earnings call, you need to listen to what the executives say, because this can swing stock prices almost as quickly as they get a sentence out.

Stocks that are flying high can fall just as big — and fast — when earnings are reported or major moves are made that are considered negative.

The Rules of After Hours Trading

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© 2018 Millionaire Media, LLC

Now let’s talk brokers. After-hours rules aren’t the same as those during normal trading hours, so you need to be careful when you’re hunting for a broker.

If after-hours trading is something you need in a broker, make sure you understand the rules, because every broker has different restrictions.

Many brokers do offer after-hours trading. You just have to make sure the rules and restrictions suit your goals.

For instance, many brokers charge an extra fee for after-hours trading. The fee might sound small, such as half a cent per share, but if you’re buying a lot of shares, it adds up.

Additionally, you might be limited in the types of trades you can execute. Most allow you to buy, sell, and short stock, but they don’t allow stop orders or conditional trades.

Pros and Cons of After Hours Trading

So, now that you know what after hours trading is and when it takes place, what data do you follow to help make a decision pre-market or after hours?

If you’re trading big stocks, follow economic indicators. That includes GDP, retail sales, weekly jobless claims and U.S. employment reports (which comes out on the first Friday of every month at 8:30 a.m. Eastern time). It gets tricky, though, for pre-market trading, because most of these economic reports come out around 8:30 a.m., so there’s not much time to get ahead the market.

But, if you’re chasing down smaller stocks with higher volatility, or penny stocks, pay attention to earning releases and news events.

Earnings reports come out before the market opens and after it closes. That’s why after-hours trading can be a bit more exciting that the regular 9:30 a.m. to 4 p.m. business. When these earnings come out they can be a bit of a shock to the stock, with major price movements, while most others aren’t paying attention.

Earnings sessions can be a gold mine. They happen during the 1–2 weeks after the end of each quarter — so mid-January, April, July and October.

You’ll also want to keep up with the news and look for any catalysts that might have been reported the night before — while everyone was sleeping — or early in the morning before normal trading hours start.

A catalyst (aside from earnings reports and calls) might be a media pump (beware!), a new product launch, or any major change that could spark significant movement in the stock, one way or another.

But what about the potential risks?

For one thing, you’re generally dealing with low liquidity. If you need to close out a position fast, you might not have the option because there aren’t any buyers or sellers, depending on the position you took.

The bid-ask spreads tend to widen during after hours trading, too, so you might not be able to find stocks that meet your needs. Remember, never trade just to trade. Only buy or short a stock on which you’re pretty sure you can make money.

After Hours Trading on the NASDAQ

NASDAQ offers a Pre-Market Indicator you might want to check out.

This is NASDAQ’s attempt to gauge market sentiment before the market opens. And today’s data availability means that this can offer us a much bigger snapshot because it’s actually based on real after-hours trading data.

Of course, you can’t always rely on data because it’s not technically delivered in real time and it’s not always accurate. As always, research your plays before you commit.

Examples of Biggest After Hours Movers

Certain stocks are known to experience lots of activity on the after-hours market. Here are three on my watch.

AMZN After Hours

It should come as no surprise that Amazon’s stock remains active long after the trading floor closes down. Part of this comes from the fact that it’s a major international corporation that does business at all hours, but it’s also because it sometimes experiences unexpected price movements.

DOW After Hours

The same is true for the Dow Jones Industrial Average. It’s an index that includes 30 of the largest corporations, so it’s bound to see activity both pre-market and during after-hours trading.

AAPL After Hours

Then you have Apple. It’s one of the most beloved brands in the world, and that adoration extends to its stock. You can, at times, take advantage of after-hours trading on shares of APPL based on recently released news, such as — you guessed it — a new iPhone.

After Hours Trading vs Pre-Market Trading

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Clock and step of coins stacks on working table. Via shuttersock.com

After hours trading and pre-market trading are essentially the same thing: extended trading hours. However, the way you make decisions changes depending on whether you’re trading in the morning or evening.

In most cases, pre-market trading hinges on information that came out overnight. Those who get up early can read the reports and learn about fresh developments.

After-hours trading involves capitalizing on stock price movements during the day and on anticipated news or economic indicators for the next morning. If you’re planning to hold overnight, though, you need a good indication that the stock will perform the way you expect, whether you’re buying or shorting.

Tips for Traders on How After Hours Markets Work

After hours markets perform a little differently than they do during the day. Keep the following factors in mind when making trading decisions.

How Does After Hours Trading Work?

After-hours trading works differently depending on your broker. As I mentioned before, brokers set their own rules about what types of trades you can make, what hours constitute after-hours trading, and whether you have to pay extra.

Otherwise, you can buy, sell, and short stock the same way you would during the day. Just keep in mind that the economic indicators need to be strong.

How to Analyze After Hours Stock Prices

Stock charts are your best friend when it comes to after-hours trading. You want to know what a specific stock has done during previous after-hours markets. Has it held its price overnight, for the most part? Are there any specific catalysts that tend to make it break out once the market closes?

Brokers For After Hours Trading

There are a couple brokers, in particular, that you might consider for after-hours trading. You should also investigate other brokers on your own to figure out which one is most ideal for your trading strategy.

Robinhood After Hours Trading

If you’re using the massively popular, commission-free (yes, it’s free) Robinhood trading app — the favorite among Millennials — you won’t be able to take advantage of after-hours trading unless you choose their gold package, which isn’t free. And keep in mind that their executions can lag (so much for their savings in commissions!).

Remember, just because something is free doesn’t mean it’s beneficial. In fact, the opposite is often true. I’d rather pay for a great broker than have my decisions limited by a free broker.

TD Ameritrade After Hours Trading

TD Ameritrade is one of my preferred brokers, and for good reason. It’s a stand-up company that has stood the test of time.

This broker lets clients trade after hours from 4:02 p.m. until 8 p.m. Eastern. The company also offers 24-hour trading five days per week on certain securities.

After Hours Options Trading

In most cases, you’re limited to buying, selling, and shorting stock after hours. Most brokers don’t let you trade options — or futures, for that matter — after the trading hours officially end.

The same goes for complex plays. The after-hours trading market typically involves only unconditional trades.

Finding the Most Volatile Stocks with After Hours Volume

Volatility can be sign that you’re found a good candidate for after-hours trading. As long as you’ve correctly interpreted the charts and paid attention to market news, you can sometimes trade more comfortably on highly volatile stocks.

Tools like StocksToTrade offer plenty of resources for finding the most high-volume and volatile stocks for after-hours trading. You can then narrow down your options based on economic indicators and other criteria.

Learn with Me in the Trading Challenge

If you want to learn more about pre-market and after hours trading, apply to join my Trading Challenge.

It’s tough to learn about smaller aspects of the stock market, such as extended hours, on your own. I like to save my students time by teaching them everything I know.

How is Late-Day Trading Different from Trading in the After Hours Market?

The stock market tends to be much more volatile during late-day trading than in the after-hours market. Investors are closing out their positions, identifying stocks to buy and hold overnight, and making other decisions in the race before time runs out.

Then, there’s a cooling-off period. The trading floor closes, most investors head home to their families, and volatility reduces sharply. However, many people continue to play with after-hours trading. You just have to find the right stocks.

Conclusion

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© 2018 Millionaire Media, LLC

Learning how the stock market works can seem like a daunting task. Trust me, I’ve lived it, and there are still things I can learn to become a better trader.

Keep learning, researching, and practicing. Learn from your mistakes, whether you’re trading during hours or after hours. Then let me know how it goes.

Do you enjoy after-hours trading? Why or why not?

Let us know in the comments below. Common now, don’t be shy!

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