Before trading the aftermarket movers, let’s first look at what “after hours” is? Why do stocks move after hours? How to find after hours (big) movers and the pros and cons of trading after hours and some trading strategies. While this time period provides the official open and close for the day, and most of the daily volume occurs between these times, trading also takes place outside these hours. Pre-market trading is from 4 a.m. (Nasdaq) and 7 AM (NYSE, but 4 a.m. for NYSE ARCA securities) EST to 9:30 a.m. EST. The stock market then trades its official hours. Trading that occurs between 4 p.m. EST and 8 p.m. EST is called extended hours or aftermarket trading. News events, such as earnings, are often released after hours. Earnings can cause big movements in the price and are a key metric that institutions and investors use to determine whether they want to buy or sell a stock. When earnings are released after hours, traders try to act on the information (hoping to get a jump on most of the traders and investors who won’t be trading until the next day). It causes rapid and sizable moves in the share price. This volatility also attracts day traders who look to enter and exit trades for a quick profit. Ultimately, stocks move after hours for the same reason they move during the normal session — people are buying and selling. It is important to note that just because people can trade after hours, doesn’t mean after-hours trading takes place in all stocks. If there is little interest in a stock, it may have no after-hours trades (remember, for a trade to occur there must be a buyer and seller who are willing to transact at the same price). While earnings in large companies often produce a lot of after-hours activity, earnings in a small, relatively unknown company may not attract any after-hours trades at all. Companies publish, in advance, when they will be releasing earnings (and whether it 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. Most trading and charting platforms also provide some form of the pre-market and after-hours active list. Check with your broker and/or platform provider to see if this functionality is available to you. As mentioned above, earnings in well-known companies typically offer the best trading opportunities. Price movement and volume are required, so if no one cares about the stock then the volume isn’t going to be there (even though a few traders may cause the price to move).
Less competition
With fewer active traders, an individual can nab favorable prices that may not be available once more liquidity enters the market again. Unfortunately, this advantage also has a downside. Less competition means:
Less volumeErratic price moves
While it is possible to get some favorable prices and trades after hours, you could also be on the losing end of that deal (you might be the one giving a good price to someone else). With wild price swings and sporadic volume, if you end up on the wrong side of a move it can be devastating. There may be lots of volume in the stock overall, but not necessarily at the price you want to get in or out at. Another con is that what looks like an easy trade on a chart may actually not be. The attached chart shows an earnings release right after the bell. In the first minute after the release, the price jumps more than $2.75, but only on 10,000 volume. That means very few people were able to buy this stock (or cover short positions). In the next minute, the price moved up by more than $1.50, and 14,000 shares changed hands. In the next minute, the price rallied more than $2.15 on 27,000. This may seem like decent volume, but with a bunch of traders and institutions all trying to buy very few shares over a span of $6.50, it is tough to grab a piece of a pie. As the stock price begins to settle down around 4:15 p.m. (16:15 on the chart), more traders are able (or willing) to participate and volume increases. Even though a lot of the movement had already happened by 4:15 p.m., there was still ample movement for trades. Between 4:15 p.m. and 5 p.m. the stock covered a more than $0.80 range. The con here is that the big moves are tough to get in on. The pro is that there is usually an opportunity to get some trades in once the initial pandemonium has subsided and there is still volume (or increasing volume). Traders may opt to use a news-related strategy or a trend following strategy. While the strategy guidelines will be the same for trading after hours and during regular market hours, traders should make extra accommodation for increased spreads, lower volume, and bigger price moves when trading after hours. These factors could render stop losses ineffective, which means an increased risk of large losses. For this reason, consider reducing your position size (from what you would normally trade during regular market hours) if trading after hours. Stocks that do many millions of shares a day during the regular session may see some after-hours activity after the close. Earnings can cause big price moves and attract lots of traders (volume) into stock after hours. But once again, not all stocks will experience enough volume to warrant day trading after hours. Use similar strategies to what you use intraday, but pay special attention to the possibility of increased spreads, lower volume, and larger price moves. Consider reducing your position size to compensate.
