The early bird gets the worm … so by that logic, premarket trading is where you’ll find the best opportunities, right?
Well … not quite. But premarket trading can be useful in certain situations.
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. It’s possible to execute trades during this time — it’s called premarket trading.
But be warned: premarket trading is not for the faint of heart. It’s usually volatile, and the risk level can be higher than during regular trading hours. However, sometimes big moves happen in premarket hours that can create compelling opportunities.
It’s worth taking the time and effort to understand premarket trading. Here, I’ll explain what it is, how it works, and some of the risks and considerations you should keep in mind when trading during the off-hours.
Table of Contents
- 1 What Is Premarket Trading?
- 2 Premarket Trading Hours
- 3 How Can You Buy Premarket Stock?
- 4 Uses for Premarket Trading
- 5 Benefits of Premarket Trading
- 6 Risks of Premarket Trading
- 7 Understanding Premarket Activity
- 8 Characteristics of Premarket Movers
- 9 Example of Premarket Trading
- 10 Premarket Trading Techniques
- 11 Premarket Trading Tips
- 11.1 Understand the Market’s Mood and Trade Appropriately
- 11.2 Unless There’s News, Wait for Regular Market Hours
- 11.3 Use Direct Access Brokers
- 11.4 Think About Sympathy Sell-Offs
- 11.5 Premarket Charting
- 11.6 Have an Effective Trading Technique in Place
- 11.7 Avoid Overleveraging
- 11.8 Look for Forced Liquidations on Margin Calls
- 11.9 Watch for Stock Halts
- 11.10 Trading Challenge
- 12 Should You Consider Premarket Trading?
What Is Premarket Trading?
Premarket trading refers to activity in the stock market that happens before the regular market session opens.
The stocks that move before the market opens for the day are sometimes called premarket movers.
Premarket Trading Hours
Premarket trading occurs in the period before the regular market open at 9:30 a.m. Eastern.
Premarket trading sessions go from 4 a.m. to 9:30 a.m. But that doesn’t necessarily mean that you can execute during these hours.
Who Can Trade Pre-Market?
Premarket trading is more common for bigger investors, but it can be accessible to individual traders like you and me, too. However, it doesn’t work exactly the same as trading during regular market hours.
How Can You Buy Premarket Stock?
Lots of brokers count premarket trading among their offerings.
But different brokers may have different rules or available times for premarket trading. So if you’re interested in trading in the early hours, be sure to check your broker’s policies (and fee schedule, while you’re at it) for premarket trading.
For instance, even though premarket trading starts at 4 a.m., your broker might only offer premarket trading from 6–9:30 a.m.
The style and how premarket 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 premarket trades. But there are some exceptions…
Always read the fine print. Some brokerages have special fees or a surcharge during these times. Sometimes it can be a per-share fee … and that can add up.
Your broker’s specific policy should be fairly easy to find either on their website or by contacting their customer service department.
Uses for Premarket Trading
Evaluating premarket movers can help you analyze which 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 into what’s happening in the market at large.
Benefits of Premarket Trading
Premarket movers can have a big influence on the trading day. Even if you don’t intend to do any premarket trading, there are plenty of benefits to looking at what happens in the premarket.
Premarket Movers: Their Influence
Here’s an example of how premarket trading could prove beneficial to you as a trader.
Say 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 once regular trading begins.
You can pick up on momentum-inspiring company news, mergers, or earnings reports that could affect the overall market.
So yes, a premarket mover can influence your specific stock picks. But in a bigger way, it can also offer some great information about hot sectors, industries, and the direction of the economy.
So even if you have no desire to trade in the premarket hours, it can still be worth your time to see what premarket movers are doing.
Risks of Premarket Trading
Trading premarket isn’t the same as trading during regular market hours. To better understand the risks, let’s take a minute to further discuss…
Trading Premarket vs. Standard Market Hours
I’ll just put it out there: premarket trading can be a lot more complicated than regular market hours.
For one thing, there can be different limits and fees associated with premarket trading. That all depends on your broker.
For another, there’s a higher level of volatility and risk associated with premarket trading. That’s because there aren’t as many checks and balances (the presence of market movers, volume, etc).
Trading during market hours is obviously ideal. That’s when you typically see the most activity and get a better idea of what’s going on with the stock by charting its movements.
Trading Premarket vs. After Hours
Basically, the difference is just what it sounds like. Premarket trading 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.
Again, you gotta check with your broker to see the exact hours available to you.
Like with premarket trading, after-hours trading may be subject to some limits and 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.
Understanding Premarket Activity
How can you get a handle on what’s going on in the premarket? Here are some proactive steps and helpful tips for actions you can take:
- Keep up with the news. Be sure to look for news that could affect open positions. Upgrades, downgrades, and other stories that can move stocks can help you discover opportunities for the upcoming session as well as in the premarket.
- 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’s moving macros, economically speaking. News items are the big catalyst here. See what’s been moving the world markets and think about how it could impact the U.S. session. For example: news regarding a central bank or a big economic-data item could make for premarket movement.
- Keep track of other traders. You can scan premarket securities by volume on a platform like StocksToTrade to get an idea of where other traders are putting their money. You can then cross-reference this information by looking for catalysts that could be causing the activity.
- Check levels on open positions. Levels matter when analyzing premarket trading. Check out the key levels on open positions. Watch for index futures, especially after big economic data releases. This can precede breakouts or breakdowns in the normal trading hours.
- Consider the timing. 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. Algorithmic trading is a big topic for another day. But in short, it’s about how algorithms can push securities to move and temporarily blow up or deflate prices. The big question: can these dips potentially create opportunities?
- Don’t be swayed. Even if you see a stock going extremely red or green the premarket, it may not matter. You still need to research expectations for the stock.
Characteristics of Premarket Movers
What should you look for to determine if it’s a serious premarket mover? Here are a few key characteristics:
- Stocks that have higher price gaps based on the previous day’s market close
- Stocks that have noteworthy price drops
- Stocks with high volume (most actively traded)
Example of Premarket Trading
Let’s look at how premarket trading might play out in a hypothetical scenario.
Say you consider $25 the strike zone for a particular stock, and it drops to $20 in the premarket hours. It could be right back at or above $25 when the market re-opens.
Also suppose that you catch wind of a positive catalyst — like a big, juicy news item or a stellar earnings report.
In this case, the stock might be a compelling pick during the premarket session so that you could lock in that price.
Premarket Trading Techniques
Curious about testing the waters yourself? Here are some important things to consider and techniques that traders use to find premarket opportunities.
Earnings season and its resulting earnings breakouts make for some of the most important times of year for stock movement.
This is when companies release their quarterly earnings reports. It commences shortly after the close of the quarter. So, earnings season happens every year in January, April, July, and October.
Earnings season can be a huge catalyst for stock movement, particularly if a stock has overshot or undershot analyst expectations. Since many earnings reports are released either right before the market open or right after its close, earnings releases can cause some big pre- and post-market moves.
Economic indicators are statistics that can help you see the overall direction of the economy. Here are some key ones to think about when considering premarket trading.
These might include big contracts, a change in the formation of a business, or the share price.
These might include GDP (gross domestic product), retail sales, and the employment rate.
These might include GNP (gross national product), interest rates, or the consumer price index. They’re called “lagging” because they’re only obvious in hindsight after related activity in the economy.
They can also be big drivers of the price action during premarket hours. Many economic releases are issued at about 8:30 a.m., one hour before the markets open. This means that there can be a big reaction to data that can move prices and affect them for the day.
For example, the Bureau of Labor Statistics (BLS) releases the Employment Situation Summary 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.
This is news that can move the market, big time. And the news doesn’t adhere to specific hours.
Premarket trading can be a way to get your edge as a trader, jumping in on a stock in reaction to news releases.
However, this comes with a caveat. The low volume in the premarket 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 premarket trading.
E-mini Futures Cues
E-mini futures are futures that are electronically traded on the Chicago Mercantile Exchange (CME). They represent a small portion of a futures contract value.
After being introduced on the CME in 1997, the E-mini became popular 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 premarket 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 some traders follow the futures market closely during premarket hours, this could provide trading opportunities. To learn more about futures, check out this post.
Watch the Premarket Spread
Mind the spread! In the premarket, the volume and liquidity are limited, which makes the bid-ask spreads bigger than usual.
Wait, what’s a bid-ask spread?
That’s the difference between the bid price and the ask price. The spread is based on supply (aka “float”), demand, and the stock’s trading activity. So since you’re removing the latter two from the circulation in premarket trading, the former will likely be more pronounced.
Premarket Trading Tips
If you’re thinking of trying premarket trading, make sure you first learn a ton about the process. These guidelines have been helpful for my trading … but they’re just that: guidelines. Always do your own research before making trades. Do your due diligence. And remember that all trading is risky.
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 premarket sessions are mostly made up of professionals. For individual traders, it’s generally not the most welcoming place.
Low volume and high volatility abound — 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 … and leave you regretting making a trade outside of regular market hours.
Unless There’s News, Wait for Regular Market Hours
Liquidity issues, bigger spreads, fewer players in the game … if premarket trading is a party, you can probably see why not too many people show up.
For many, there’s not much of a benefit to trading in the premarket hours. This is part of the reason why the premarket often begins as late as 8 a.m with some brokers.
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. Yes, premarket trading exists for a reason, but unless there’s a really compelling reason to jump in early, don’t.
Use Direct Access Brokers
Direct access brokers allow you to execute orders through ECN exchanges.
ECNs, or electronic communications networks, are a type of alternate trading system (ATS) where listed stocks and exchange-traded products can be traded.
These advanced trading platforms could give you better speed, access, and execution — so if you want to trade premarket frequently, they could be worth checking out.
Think About Sympathy Sell-Offs
Sympathy sell-offs are a phenomenon that happens when a company experiences a mass sell-off based on something that’s happening in the industry.
For instance, one stock might have a reduced price because of a bad news catalyst. This could, in turn, cause the stocks of its competitors to go down as well … just because of the association with the industry.
This is definitely something to watch for and be aware of in premarket trading. Watch what traders do and say to help you get a better idea of whether it’s really a hot stock or just hype.
Just like during regular trading hours, reviewing charts is vital to helping you analyze premarket trades. A platform like StocksToTrade gives you the opportunity to create premarket scans.
First, you want to learn who the premarket movers are. Then, you can filter them by volume. This can help you decide where to focus your attention.
Beware! Just because a stock has movement doesn’t necessarily mean you should trade it. 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.
It’s even more important during premarket than regular market hours to take the news into account. Since a big catalyst is usually what precipitates a premarket 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 … it can help you keep your emotions in check and prevent you from doing anything dumb.
With premarket trading, it’s even more critical. The stakes can be much higher, so impulsive or emotional decisions can result in bigger losses.
Know your trading strategy and have a specific plan for your entry and exit. Have stops in place. Stick to your plan!
It can be tempting to load up on stocks in the premarket. I don’t like leverage. I think it’s an invitation to blow up your account.
If you must, be very cautious with your margin, and avoid trading in the same quantities that you might handle during regular trading hours.
Remember: premarket is different. If and when momentum shifts, the liquidity can change in an instant, because the market isn’t humming along to keep prices more stable.
Look for Forced Liquidations on Margin Calls
It’s not uncommon for a broker to make adjustments to 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 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 order imbalances. If a trading halt occurs, orders could be canceled.
Because of this, it’s always important to check if a stock is emerging from a halt. It’s 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 best way to avoid making mistakes in the premarket … and any market? Prepare.
The best way to improve your odds in any trade is to invest in your education. You’ll be more likely to make smart decisions with your trades.
Ready to start investing in your education? Consider my Trading Challenge. It’s not for just anyone — you have to apply and be accepted.
I’m only interested in students who are committed to attaining their goals. You MUST be willing to study and work hard.
I created the Challenge based on what I’ve learned in the past two decades in the stock market. I’ve got a huge library of videos, webinars, and live trading webcasts … and I publicly post every trade I make.
I want to teach you how to understand the market so that you can become a self-sufficient trader who can adapt to any market conditions.
Ready to join? Apply for my Trading Challenge today.
Should You Consider Premarket Trading?
Premarket trading can create opportunities for traders, but it comes with significant risk.
Given the many unknowns with premarket 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 premarket trading…
The knowledge you can gain about the market during this time can help you build your trading plan ahead of the curve — so when the market opens, you’re ready to rock.
What do you think? How do you keep track of premarket activity? Leave a comment!