Pre-Market Trading: Key Tips on Preparation Techniques for Traders

Most people think of the stock market as a strict 9:30 a.m. to 4 p.m. affair. However, there are some important moves that happen before the regular market hours. This is called pre-market trading.

Pre-market trading is not for the faint of heart. It’s often volatile and little understood. But, as you’ll learn here, if you take the time and effort to learn how to understand pre-market trading, it can potentially provide opportunities for you as a trader.

What is Pre-Market Trading?

Pre-market trading refers to activity in the stock market happening before the regular market session opens.

The stocks that are moving after the market for the day and before it opens the next morning are sometimes nicknamed called pre-market movers.

When is Pre-Market Trading?

Depends on who you ask. Usually, the movements are focused in the early morning, in the hours preceding the regular stock market opening at 9:30 a.m., Monday through Friday.

Usually, pre-market trading sessions will be open somewhere between 4–9:30 a.m.

For example: The NASDAQ premarket session occurs from 4:15–9:29 a.m. Eastern time. This brings it right up to the moment when the regular session opens.

Who Can Trade Pre-Market?

These days, there are many options for pre-market trading. Several brokers count pre-market trading among their offerings, but some have limits on what types of orders can be used.

The exact timeframe during which pre-market trading can happen can also depend on the broker. For example: one broker might offer a pre-market session from 4–9:30 a.m., whereas another might offer a pre-market trading session running from 6–9:30 a.m.

The style and how pre-market trades are executed can also vary depending on the broker.

Some brokers, especially the big ones, typically tend to just stick to their regular commissions for these pre-market trades. But there are some exceptions …

Be sure to check the fine print before you start delving into pre-trading, because some brokerages have special fees or a surcharge during these times. Sometimes it can be a per share fee, so be sure to check it out.

Your broker’s specific policy should be fairly easy to find either on their website or by contacting their customer service department.

How to Analyze Pre-Market Trading

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How can you get a handle on what’s going on in the pre-market scene? Here are some tips and tricks for beginning to understand its movements:

  • Keep up with the headlines. Be sure to look for news that could affect open positions. Upgrades, downgrades, and other stories that can move stocks can help you discover and uncover opportunities for the upcoming session as well as in the pre-market.
  • Look at index futures. Be sure to look at the overnight session highs and lows as reported on the Russell 2000 Index futures, S&P 500, and NASDAQ 100. This is important because it creates support and resistance during the regular market hours.
  • Consider macro forces. Consider what is moving macros, economically speaking. News items are the big catalyst here. See what has been moving the world markets and think about how it could have an impact on the U.S. session. For example: News regarding a central bank or a big item of economic data could make for market movement.
  • Keep track of other traders. What are other traders doing in the pre-market? You can do a scan of pre-market securities by volume on a platform like StocksToTrade and get an idea of where other traders are putting their money. You can then cross reference this information by looking for catalysts or other things that could be causing the activity.
  • Get on the level. Levels matter when analyzing pre-market trading. Check out the key levels on open positions. Watch for index futures, particularly after big economic data releases. This can precede breakouts or breakdowns in the normal trading hours.
  • Think about timing. Timing is everything when making trades. Take into consideration the time of year, the month, and even the day in question. The season, the proximity to a holiday, the release of earnings reports, and so many things can play into a stock’s performance.
  • Look and project. Look at the closing numbers and the anticipated opening numbers for a given stock. This can help you get an idea of who stands to benefit.
  • Consider the algos. While algorithmic trading is a topic for another day, it’s about algorithms pushing securities to move, and can blow up or deflate the prices temporarily. Could you use these dips to potentially create opportunities?
  • Don’t be swayed. Even if you see a stock going extremely red or green the pre-market, it may not matter. You still need to do research on the expectations for the stock.
  • Be the early bird. Beat the crowd. Use your pre-market research to prepare a list of potential trades. Formulate a great trading plan so that you can execute quickly if you see your entry.

Characteristics of pre-market movers

What should you look for to determine pre-market movement? Here are a few key things to consider:

  • Stocks that have higher price gaps based on the previous day’s market close
  • Stocks that have noteworthy drops in price
  • Stocks with high volume (most actively traded)

Influence of Pre-Market Movers

You’ve probably already figured this out, but let me state it for the record: Evaluating pre-market movers can help you analyze what stocks are active in the market in the hours before the trading day begins.

This can provide opportunities beyond simply picking stocks to trade. Looking at these movers can help you gain insight on what’s happening in the market at large.

For instance, if you notice that there’s a lot of movement in stocks offered by companies within a particular industry, this could tip you off to a big catalyst that could have greater ripples in the market.

You can be clued in by catalysts such as momentum-inspiring company news, mergers, or earnings reports that could affect the overall market.

In this way, pre-market movers can have a big influence on the general tone of the market and can set the stage for how the day will go.

So yes, a pre-market mover can influence your specific stock picks, but in a bigger way, it can also offer information about sectors, industries, and about the direction of the economy.

In this way, even if you have no desire to trade in the pre-market hours, it can still be worth your while to look at what the pre-market movers are doing. It’s not a bad thing to include in your trading routine.

Difference Between Trading Pre-Market and During Market Hours

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I’ll just put it out there: Pre-market trading can get a lot more complicated than just waiting for regular market hours.

For one thing, there are different limits and might be different fees associated with pre-market trading, depending on your broker.

For another, there’s a higher level of volatility and certain risks associated with pre-market trading, simply because there aren’t as many checks and balances (presence of market movers, volume, etc).

Trading during market hours is obviously ideal because this is when you typically see the most activity and get a better idea of what’s going on with the stock by charting its movement.

At the same time, looking at what’s happening before the market opens can sometimes provide you with trading opportunities.

By taking the time to focus on pre-market movers, you can have a detailed trading plan ready early in the day. This means that by the time the market opens, you can potentially have a distinct advantage because you’ve already mapped out some potential trades.

Difference Between Pre-Market and After-Hours Trading

Basically, the difference is just what it sounds like.

The pre-market trading session occurs in the morning hours before the markets open.

After-hours trading occurs during the hours after the markets close, usually 4–8 p.m.

Once again, check with your broker to see the exact hours available to you.

Like some pre-market broker restrictions, after-hours trading may be subject to some limits and potentially a different fee schedule. Bottom line: Do what the SEC suggests and read all disclosure documents before proceeding.

Is one is safer than the other? Not necessarily. Both pre-and post-market trading can be illiquid, making for potentially wide spreads and volatility.

Pre-Market Trading Example

Let’s take a hypothetical look at why you might decide to try pre-market trading.

For example: Say you consider $25 the strike zone for a particular stock, and it drops to $20 in the pre-market hours. It could be right back at or above $25 when the market re-opens.

And suppose, for example, that you’ve also caught wind of a positive catalyst, like a big, juicy news item or a stellar earnings report. In this case, you might buy in the pre-market session in order to help lock in that price.

Pre-Market Trading Techniques

Curious about testing the waters yourself? Here are some important things to consider and look at if you decide you want to make pre-market trades.

Earnings Releases

Earnings season and its resulting earnings breakouts make for some of the most important times of year for stock movement.

These are the times of year when companies release their quarterly earnings reports, and commences shortly after the close of the quarter. So, earnings season happens in January, April, July, and October.

Earnings season(s) can be a huge catalyst for stock movement, particularly if a stock has overshot or undershot analyst expectations.

If you catch whiff of the earnings report or even rumors of the earnings report, this information could be a newsworthy item that might spike pre-market trading.

Economic Indicators

According to Business Dictionary, economic indicators are “Key statistics that indicate the direction of an economy.”

There are a few key types of economic indicators, including:

  • Leading indicators: these might include big contracts, a change in the formation of a business, or the share price.
  • Coincident indicators: these might include GDR (Gross Domestic Product), retail sales, and the employment rate.
  • Lagging indicators: these might include GNP (Gross National Product), interest rates, or the consumer price index. They are called “lagging” because they are only obvious in hindsight after related activity in the economy.

They can also be big drivers of the price action during pre-market hours. Many economic releases are issued at about 8:30 a.m., which is one hour before the markets open. This means that there can be a big reaction to this data that can move prices and affect them for the day.

For example, the Bureau of Labor Statistics (BLS) releases the Employment Situation Summary (which I explain in this post) at 8:30 a.m. This can have a big effect on the stock market, in terms of the GDR, retailer stocks, and so on.

Looking at the analyst numbers based on these factors can help you decide whether the movement is potentially worthy of a pre-market trade.

Headline News

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News can move … the market, that is. Pre-market trading can be a way to get your edge as a trader, jumping in on the stock in reaction to news releases.

However, this comes with a caveat. The low volume in the pre-market can give a false indication of the worth of the stock, so you might not get an accurate-enough idea of the price.

For this reason, the news has to be REALLY strong to potentially warrant pre-market trading.

E-mini Futures Cues

E-mini futures are futures which are electronically traded on the CME (Chicago Mercantile Exchange). They represent a small portion of a futures contract value.

After being introduced on the Chicago Mercantile Exchange (CME) in 1997, the E-mini quickly became a success because it made futures trading accessible to a wide variety of traders. Today, E-mini contracts can be traded on a variety of indexes, including the NASDAQ 100 and the S&P 500.

But here’s what matters in the pre-market session: the E-mini S&P 500 trades 24 hours a day. This futures market can often give signs of how the regular market might go throughout the day, so it’s sometimes like getting a preview.

Since the futures market is closely followed during pre-market hours, this could provide trading opportunities. To learn more about futures, check out this post. Additionally, this post offers a great education on E-Mini and futures market.

Watch the Spread

Mind the spread! In the pre-market, the volume and liquidity is limited, which makes bid-ask spreads bigger than usual.

Wait, what’s an ask spread?

A spread is the difference between the bid price and the ask price. The spread is based on supply (aka “float”), demand, and the trading activity of the stock. So since you’re removing the latter two from the circulation in pre-market trading, the former will likely be more pronounced.

Pre-Market Trading Tips

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If you’re thinking of trying pre-market trading, make sure you first learn a ton about the process.   These guidelines have been helpful for my trading.

Understand the Market’s Mood and Trade Appropriately

Listen to the market, and trade based on what it’s telling you right now.

After-hours and pre-market sessions are mostly made up of professionals. This is largely because it’s not a very hospitable place.

There’s low volume and high volatility galore — and it can be extremely difficult to determine entry and exit points.

For example: One big buy could have a major impact on the stock’s price. So you have to be able to consider different things and be appropriate. This means you must typically approach the pre-market differently than you would during regular trading hours.

Unless There’s News, Wait for Regular Market Hours

Liquidity issues, bigger spreads, fewer players in the game … if pre-market trading were a party, it wouldn’t necessarily be the most in-demand fiesta.

For many, there’s not much of a benefit to trading in the pre-market hours. This is part of the reason why the pre-market often begins only at 8 a.m. This is when the volume often gains momentum and we can begin to see more direct results of the news (or rumored news).

Even in such situations, it might still be wise to wait until the market opens or slightly after. However, pre-market trading exists for a reason, and while it’s not always reliable, it’s sometimes possible to gain profits during this time.

Use Direct Access Brokers

Pre-market trading is executed through something called ECN exchanges.

ECNs, or Electric Communications Networks, are a type of alternate trading system (ATS) wherein listed stocks and exchange traded products can be traded.

To be able to trade on the ECN exchange, you are required to register with the SEC as a broker-dealer.

This means that in order to trade in the pre-market, you need to either be registered, or you need to work with one of these ECN subscribers or direct access brokers. This can ensure that orders are routed right to the ECN.

Think About Sympathy Sell-Offs and Your Trading Peers

Watch out for sympathy sell-offs. This is a phenomenon that happens when a company experiences a sell-off based on something that’s happening in the industry.

For instance, one stock might experience a reduced price because of a bad news catalyst. This could, in turn, cause the stock of its competitors to go down as well, simply because of the association with the industry.

This is definitely something to watch for and be aware of in pre-market trading. Watch what traders are doing and saying to help you get an idea of whether it’s really a hot stock, or just hype.

Make Use of Pre-Market Charting

Just like during regular trading hours, reviewing charts is vital to helping you analyze pre-market trades. StocksToTrade gives you the opportunity to create pre-market scans so that you can do just that.

First, you’ll want to learn who the pre-market movers are. Then, you can filter them by volume. This can help you decide where to focus your attention.

But be warned: Just because a stock has movement doesn’t necessarily mean you should trade. It should be used more as an indicator, acting as just one piece of your research in figuring out if a stock is worth your time and effort.

Even more so than during regular hours, during pre-market times, it’s important consider outside elements such as news. Since a big catalyst is usually what precipitates a pre-market trade, be sure to look at that before formulating your trading plan.

Have an Effective Trading Technique in Place

It’s always important to have a trading plan in place, as it can help keep impulses and emotions out of the process.

However, with pre-market trading, it’s possibly even more important. The stakes can be higher, which means that the effect of impulsive or emotional decisions can result in bigger losses.

Trading plans should also consider indicators of price and momentum, and check support and resistance levels.

This is important: Be sure have stops in place. Don’t become a cautionary tale. Make entry and exit decisions, have a plan, and stick to it.

Avoid Overleveraging

It can be tempting to stock up on stocks in the pre-market. But this has blown up many an account for traders, so I strongly caution against it.

Be very cautious with your margin, and avoid trading in the quantities that you might handle during regular trading hours. The pre-market is different. If and when momentum shifts, the liquidity can change in an instant, because the market isn’t humming along to keep prices stable.

Look for Forced Liquidations on Margin Calls

It’s not uncommon for a broker to make adjustments to the margin requirements based on a stock’s volatility.

This can land traders in potentially bad positions when the market opens. If they’re overleveraged and then the margin changes, they might face an unexpected liquidation. Don’t let it happen to you.

Watch for Stock Halts

A trading halt is a temporary halt on trading, either in one exchange or across the board in several exchanges at once.

Usually, trading halts happen for a few reasons, including the anticipation of news announcements, regulatory issues, or due to the need to correct imbalances in orders. If a trading halt occurs, orders may be canceled.

Because of this, it’s always important to check if a stock is emerging from a halt. Certain stocks can commonly halt in the pre-market. For example: If you get stuck in a halt, you may not know the status when it opens back up.

It’s well worth the small amount of time required to find out if there’s a halt, especially if the news or catalyst isn’t strong.

The Bottom Line

Pre-market trading can create opportunities for traders, but it comes with an assertive amount of risk.

Given the many unknowns with pre-market trading, it’s not generally a technique that’s suitable for new traders.

However, this doesn’t mean that you can’t still potentially benefit from pre-market trading. The knowledge you can gain about the market during this time can help you form your trading plan ahead of the curve — so when the market opens, you’re ready to rock.

Do you keep track of the pre-markets?