Profiting from Extended Hours Trading

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Few symbols stand closer to the heart of the non-trading public’s image of the stock market than the iconic “closing bell,” which famously rings at 4 PM EST each trading day. Of course, for today’s investors, the closing bell is just that: a symbol.

First of all, in an era of truly global equity markets, you can be sure that at least one major international stock exchange is operating at any given time. More fundamentally, today’s investors have a mechanism for investing even in stocks listed on exchanges that are currently closed: extended hours trading. Extended hours trading specifics can vary between brokerages, but in the United States it’s typically divided into “after hours” (4:00 PM to 8:00 PM) and “pre-market” (4 AM to 9:30 AM)

For a long-time, extended hours trading was the exclusive domain of large institutional investors, who could privately offer one another quotes on a stock even when markets were closed. Smaller traders simply didn’t have access to the information necessary to trade after-market. As you might guess, this situation was a major disadvantage for smaller investors.

Here’s the key: firms typically make major news announcements likely to impact their stock’s valuation outside of regular trading hours, seeking to limit the volatility created by the announcement. This means traders with the ability to trade in extended hours have a huge leg up in profiting on major news events.

Today, technology platforms called ECN’s (electronic communication networks) have effectively democratized extended-hours trading, allowing many qualified investors to take part. It’s important to understand that this marketplace offers both unique opportunities and distinct risks:  

1.    Volume Can Be Limited

While more popular than ever, extended hours trading still doesn’t feature anywhere close to the volumes associated with intra-session trades. You may not be able to purchase a stock at the time that you want it (particularly for smaller market cap equities). Concurrently, less trading volume means wider bid-ask spreads (the difference between what sellers are asking and buyers are bidding), so you can’t always be ideally precise with your acquisition price.

2.    Cyclical Volume

While volume can be limited at times, it does have predictable peaks (especially, for instance, in the morning hours before the market opens) which help define ideal times to conduct extended hours trades. For instance, a trader could sit down from 7-8PM to examine after-hours news announcements and place orders, looking to get in ahead of a morning volume surge. Traders looking for higher volume for a more precise entry point could wait for 8:30-9:30 AM, looking to profit on the momentum of the opening bell. Indeed, a profitable morning coffee appears to be a favorite target for News Quantified users.

3.    Agility for Profits

The rewards for dealing with these volume issues come in the form of an added capability to maximize gains from news-based stock trades. You could still trade on these news events using normal hours trades, but you’d likely be sacrificing margin to traders utilizing extended hours every single time. Particularly when combined with a real-time stock news analytics service like News Quantified, after-hours and pre-market announcements are an essential hunting ground for news-based traders,. Profitable news events typically announced outside of normal trading hours include earnings reports, technology breakthroughs, merger and acquisition announcements, productivity reports for mining/energy stocks, and much more.

4.    A Data Savvy Marketplace

One thing to keep in mind about after-hours trading: you’ll be in a filtered marketplace even more full of data-savvy investors than usual. Competing without a solid dataset is not recommended. Why? Comprehensive historical data allows you to see how much a stock typically reacts to a positive or negative news event. Without this information, investors are reduced to guessing how much a stock is likely to shift after an announcement.

If you’d like to learn more about combining real-time news analytics with powerful historical data to beat hedge funds at their own game, we recommend one of our totally free virtual training sessions. There’s still room in our next session; you can sign up using the button below:

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