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After-Hours Trading – A Comprehensive Guide

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Written by Timothy Sykes
Updated 9/16/2023 14 min read

After-hours trading is the period of trading that happens when the closing bell rings. On the Wall Street stock exchanges like the NYSE and Nasdaq, after-hours trading goes from 4 p.m. to 8 p.m. Eastern. It’s the time when investing businesses and services clock out, and most people don’t trade their investments.

Trading exchanges are the same as any other marketplace: they have opening and closing times. Traders need to know when to show up and when to leave, right?

If you’re just starting out as a stock trader, one of the first things you need to know is when to trade. In this article, I’ll talk about the restrictions on after-hours trading, and the bottom line on its trading purposes.

What Is After-Hours Trading?

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After-hours trading refers to the buying and selling of securities outside of the standard trading hours of the major exchanges, such as the NYSE and Nasdaq. It takes place in what’s known as the extended-hours market, which includes both the pre-market session in the morning and the after-hours session in the evening.

This extended-hours market is facilitated by electronic communication networks (ECNs), which are computerized systems that automatically match buy and sell orders. ECNs have made after-hours trading information and data more accessible to individual investors, who were previously largely excluded from these markets.

Benefits of After-Hours Trading

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One of the main benefits of after-hours trading is the ability to react to news events that occur outside of regular market hours. This can include earnings reports, economic indicators, and other significant events that can have a major impact on a stock’s price.

For example, if a company releases a positive earnings report after the market closes, you can potentially buy the stock in the after-hours market and then sell it for a profit when the market opens the next day. This ability to act quickly on news events can give you a significant advantage over other investors.

Risks of After-Hours Trading

However, after-hours trading also comes with its share of risks. These include lower liquidity, higher volatility, and wider spreads.

Lower liquidity means there are fewer buyers and sellers in the market, which can make it more difficult to buy or sell shares. Higher volatility means prices can change rapidly and unpredictably. Wider spreads mean there is a larger difference between the bid price (what buyers are willing to pay) and the ask price (what sellers are willing to accept), which can make it more difficult to execute trades at favorable prices.

Who Can Trade After Hours?

In the past, after-hours trading was primarily the domain of large institutional investors. However, with the advent of electronic communication networks (ECNs), individual investors now have the ability to trade after hours as well.

This has leveled the playing field to some extent, but it’s important to note that institutional investors still have certain advantages in the after-hours market. For example, they often have access to more sophisticated trading tools and resources, and they can have a significant impact on the market due to the large size of their trades.

To better understand these tools and resources, consider exploring this guide on the best trading platforms for day traders.

How to Get Access to After-Hours Trading?

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To get access to after-hours trading, you’ll need to have an account with a brokerage firm that offers this service. Many online brokerages, such as E-Trade and TD Ameritrade, offer after-hours trading to their customers.

When choosing a brokerage for after-hours trading, it’s important to consider factors such as the firm’s trading hours, fees, and the types of orders you can place. It’s also a good idea to test out the firm’s trading platform in the after-hours market using a virtual or demo account before you start trading with real money.

Check out my guide to the after-hours brokers with the best performance and convenience for day traders!

Preparing to Trade After Hours

Before diving into the world of after-hours trading, it’s essential to prepare adequately. This includes understanding the latest news, comprehending the fundamentals of the companies you’re interested in, and staying on top of market trends. It’s also crucial to understand the specific characteristics of after-hours trading. For instance, knowing how lower liquidity and higher volatility can impact stock prices is key. To get a solid foundation, check out this guide on day trading basics.

Research the Market

Just like with regular trading, it’s crucial to do your homework before you start trading after hours. This includes keeping up with the latest news, understanding the fundamentals of the companies you’re interested in, and staying on top of market trends.

You should also familiarize yourself with the specific characteristics of the after-hours market. For example, you should understand how the lower liquidity and higher volatility can impact the prices of stocks, and how the wider spreads can affect the execution of your trades.

Different investment vehicles function differently in the after-hours period. Bonds, CDs, and ETFs may all have different fees and liquidity. Penny stocks and stocks on the Dow Jones will behave differently. Even mortgage rates change differently here!

Develop a Trading Strategy

Having a solid trading strategy is key to success in after-hours trading. This includes setting clear goals, defining your risk tolerance, and determining how much capital you’re willing to invest.

Your strategy should also include specific guidelines for entering and exiting trades. For example, you might decide to only enter trades based on certain technical indicators or news events, and to exit trades when you’ve reached a certain profit target or loss limit.

For more insights on creating a robust strategy, check out this guide on day trading strategy.

Assess the Volume and Price Movements

Volume and price movements can be significantly different in the after-hours market compared to the regular market. It’s important to understand these differences and how they can impact your trades.

For example, lower volume can lead to higher volatility, which can result in larger price swings. This can create opportunities for profit, but it can also increase the risk of losses. Similarly, larger price movements can result in wider spreads, which can make it more difficult to execute trades at favorable prices.

Choose an Appropriate Brokerage Firm

Not all brokerage firms offer after-hours trading, and those that do may have different rules and fees. It’s important to choose a brokerage firm that fits your needs and understand their policies regarding after-hours trading.

For example, some firms may only offer after-hours trading on certain exchanges or for certain types of securities. They may also have different trading hours, order types, and fee structures for after-hours trading. Be sure to read the firm’s after-hours trading agreement and disclosure documents carefully before you start trading.

Placing an Order During Extended Hours

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When it comes to trading a security during extended hours, there are a few things you should know before spending your hard-earned cash…

Connect to Electronic Communication Network (ECN)

To trade after hours, you’ll need to connect to an ECN, which is a type of computer system that facilitates trading outside of regular market hours. Your brokerage firm can provide you with access to an ECN.

When placing an order through an ECN, it’s important to understand that your order will be competing with orders from other traders, including institutional investors. This means that you may not always be able to execute your trades at your desired prices.

Consider Fees for Extended Hours Trades

Trading after hours can come with additional fees. These can include ECN fees, extended hours trading fees, and others. It’s important to understand these fees and take them into account when calculating your potential profits and losses.

For example, if your brokerage firm charges a fee for each share traded in the after-hours market, this could significantly reduce your profits on small trades. Similarly, if the firm charges a minimum fee for each after-hours trade, this could make it less cost-effective to place small trades.

Understand Pre-Market and Post-Market Trading Sessions

The extended-hours market is divided into two sessions: the pre-market session, which takes place in the morning before the regular market opens, and the post-market session, which takes place in the evening after the regular market closes. Each session has its own unique characteristics and risks.

For example, the pre-market session can be influenced by news events that occur overnight, such as economic reports from other countries. The post-market session can be influenced by news events that occur after the regular market closes, such as earnings reports.

Monitoring Your Trade During Extended Hours

Once you’ve placed your trade, it’s important to monitor it closely. This includes keeping an eye on the stock’s price, volume, and other key indicators, as well as staying on top of any news events that could impact the stock.

Monitoring your trade can help you make informed decisions about when to exit the trade. For example, if the stock’s price starts to move against you, you might decide to cut your losses and sell the stock. Conversely, if the stock’s price starts to move in your favor, you might decide to take your profits and sell the stock.

Factors to Consider for Successful After-Hours Trading

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When it comes to after-hours trading, there are a few key factors to consider to see the results you’re targeting.

Volume

Volume is a measure of how much of a particular stock is being traded. In the after-hours market, volume can be significantly lower than during regular market hours, which can lead to higher volatility and wider spreads.

Understanding volume patterns in the after-hours market can help you make more informed trading decisions. For example, if a stock has high volume in the after-hours market, this could indicate strong investor interest and could potentially lead to larger price movements.

Price

Price movements can be more volatile in the after-hours market due to lower liquidity and fewer participants. It’s important to understand these price movements and how they can impact your trades.

For example, if a stock’s price is moving rapidly in the after-hours market, this could indicate high volatility, which could increase the risk of your trade. Conversely, if a stock’s price is relatively stable in the after-hours market, this could indicate lower volatility, which could reduce the risk of your trade.

Participation

The number of participants in the after-hours market can be much lower than during regular market hours. This can result in less competition, but it can also make it more difficult to buy or sell shares at your desired price.

Understanding the level of participation in the after-hours market can help you gauge the liquidity of a particular stock. For example, if a stock has a high level of participation in the after-hours market, this could indicate good liquidity, which could make it easier to execute your trades.

Standard Trading Vs After-Hours Trading – Understanding the Differences

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While there are many similarities between standard trading and after-hours trading, there are also some key differences. These include differences in liquidity, volatility, and trading rules. It’s important to understand these differences before you start trading after hours.

For example, liquidity can be much lower in the after-hours market, which can lead to higher volatility and wider spreads. Additionally, most brokerage firms only allow limit orders in the after-hours market, which can limit your flexibility in executing trades.

How Does After-Hours Trading Affect the Stock Price?

After-hours trading can have a significant impact on a stock’s price. This is because the price of a stock is determined by supply and demand, and in the after-hours market, there can be significant changes in supply and demand due to news events, analyst statements, and other factors.

For example, if a company releases a positive earnings report after the market closes, this could increase demand for the stock in the after-hours market, which could drive up the stock’s price. Conversely, if a company releases a negative earnings report, this could decrease demand for the stock, which could drive down the stock’s price.

How To Be Successful in After-Hours Trading

Success in after-hours trading comes down to preparation, strategy, and risk management. This includes doing your homework, having a solid trading strategy, understanding the risks, and being prepared to adjust your strategy as market conditions change.

For example, you should always do your research before you start trading in the after-hours market. This includes understanding the fundamentals of the companies you’re interested in, keeping up with the latest news, and understanding the specific characteristics of the after-hours market.

Key Takeaways

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After-hours trading offers a unique opportunity for investors to trade outside of regular market hours. However, it also comes with its own set of risks and challenges. By understanding these risks and preparing accordingly, you can increase your chances of success in the after-hours market.

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Do you trade after-hours? Let me know in the comments — I love hearing from my readers!


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”