How to Trade the After-Market Movers

Trading large changes after hours is the Wild West of stock trading. When volume is low(er), and fewer traders are purchasing stocks, swings can be dramatic and quick. It implies a high-profit potential but also a high risk, and in certain cases, determining the risk might be tricky. Before we trade the aftermarket movers, let's define "after hours." Why do stocks fluctuate after hours? Find more about after-hours (huge) movers, the benefits and drawbacks of trading after hours, and some trading tactics.

After Hours Trading Definition

In the United States, normal stock market trading hours are 9:30 a.m. EST to 4:00 p.m. EST. It is the busiest trading day for the New York Stock Exchange (NYSE) and NASDAQ exchanges, as banks and institutions are also open at this time. It is also the time when opening and closing prices are given (on websites and in newspapers). The 9:30 a.m. price is open, while the 4 p.m. price is closed. While this is the official open and close for the day, and the majority of the daily volume happens during these periods, trading also occurs outside of these hours. Pre-market trading hours are 4 a.m. (Nasdaq) and 7 a.m. (NYSE), but 4 a.m. for NYSE ARCA stocks. The stock market then trades during its regular trading hours. Trading is known as extended hours or aftermarket trading between 4 p.m. EST and 8 p.m. EST.

Why Stocks Move After Hours

Beyond the closing bell at 4 p.m., there may still be traders wanting to enter or exit positions, keeping the action running for an hour or more after the official closure. It may happen with equities that trade in the millions of dollars every day. These high-volume stocks may see some aftermarket action every day. Many equities, particularly those with smaller turnover during the regular session, may have no trading after hours. Earnings reports, for example, are frequently issued after hours. Earnings may cause large price changes and are a major statistic that institutions and investors use to decide whether to purchase or sell a firm. When earnings are announced after hours, traders try to act on them (hoping to gain a start on the majority of traders and investors who won't be trading until the next day). It produces large and quick movements in the share price. This volatility draws day traders who want to join and exit transactions quickly for a profit. Finally, equities move after hours for the same reason they do during the regular session: individuals buy and sell. It is crucial to realize that just because people can trade after hours does not indicate that all equities are traded after hours. If a stock has a limited interest, it may not have any after-hours trading (remember, for a trade to occur, there must be a buyer and seller who are willing to transact at the same price). Profits at huge firms often generate a lot of after-hours trading, but earnings in a tiny, relatively unknown company may not generate any after-hours trading at all.

Finding After Hours (Big) Movers

There are a few locations to search for traders who want to get into trades after earnings or day traders who want to trade the earnings volatility. Companies announce when they will release results in advance (and whether it will be after hours). Yahoo! Finance displays all earnings. There are a few locations to search for traders who want to get into trades after earnings or day traders who want to trade the earnings volatility. Companies announce when they will release results in advance (and whether it will be after hours). Yahoo! Finance displays all earnings. Traders can also monitor stocks that move after hours using the MarketWatch After Hours Screener or the NASDAQ After Hours Most Active list. Pre-market and after-hours active lists are available in most trading and charting applications. Check with your broker and/or platform provider to see if this service is available to you.

Pros and Cons of Trading After Hours

There is one significant advantage to trading after hours:

There is less competition.
Because there are fewer active traders, an individual can obtain attractive pricing that may not be accessible until greater liquidity returns to the market.

Unfortunately, this benefit has a drawback. Reduced competition means:

Reduced volume
Price fluctuations that are erratic

While it is possible to obtain favorable rates and deals after hours, you may also find yourself on the losing end of that transaction (you might be the one giving a good price to someone else). With unpredictable price swings and intermittent volume, being on the wrong side of a move may be disastrous. Overall, there may be a lot of activity in the stock, but not always at the price you want to enter or exit. Another disadvantage is that what appears to be an easy transaction on a chart may not be. The linked graphic depicts an earnings report immediately following the bell. The price climbs more than $2.75 in the first minute following the release, but only on 10,000 volumes. This indicates that only a small number of people were able to purchase this stock (or cover short positions). Within the following minute, the price increased by more than $1.50, and 14,000 shares were traded. Within the next minute, the price of 27,000 rose by more than $2.15. This may appear to be good volume, but with a slew of traders and institutions all seeking to acquire a small number of shares for $6.50, it is difficult to get a piece of the action. More traders are able (or willing) to engage when the stock price begins to stabilize at 4:15 p.m. (16:15 on the chart) and volume grows. Even though much of the action had already occurred by 4:15 p.m., there was still plenty of room for trades. Between 4:15 p.m. and 5 p.m., the stock fluctuated by more than $0.80. The disadvantage here is that the large changes are difficult to participate in. The advantage is that once the initial frenzy has passed and there is still activity, there is generally an opportunity to get some deals in (or increase volume).

How to Trade in After Market Hours

Some traders choose to build tactics for trading after hours or during news occurrences. Nonetheless, after-hours methods are often relatively comparable to those utilized during regular trading hours. Traders can choose between a news-based method and a trend-following technique. While the strategic principles for trading after hours and during regular market hours are the same, traders should account for greater spreads, reduced volume, and larger price changes when trading after hours. These circumstances may render stop losses ineffective, increasing the danger of substantial losses. As a result, if trading after hours, consider lowering your position size (from what you would typically trade during regular market hours).

Final Word on Trading After Hours

After-hours trading in US equities happens between 4 p.m. and 8 p.m. While after-hours transactions are possible at this period, this does not imply that all equities have after-hours trades. Most stocks, in fact, do not. After 4 p.m., most stocks are deserted, with no one prepared to purchase or sell at the day's closing price. After-hours trading may occur in stocks that trade millions of shares each day during the normal session. Earnings can trigger large price movements and draw a large number of traders (volume) into stock after hours. However, not all companies will see enough activity to merit day trading after hours. Use identical tactics as you would for intraday trading, but keep in mind the risk of wider spreads, lesser volume, and higher price swings. To compensate, consider lowering the size of your position.

Frequently Asked Questions (FAQs)

How do stock prices move after hours?

Because many brokerages enable traders to conduct transactions outside of usual market hours, stocks move after hours. Every deal, regardless of when it occurs, has the ability to change the price. However, because there are fewer active traders, spreads are often higher, making after-hours price movement more erratic and inconsistent. Some equities may only trade a few shares after hours, while others may never trade.

What are your thoughts on the % change in stock due to overnight trading?

It may be difficult to quantify the impact of overnight trade when looking at a basic line chart. Because they show the open and close prices for each interval, bar charts and candlestick charts may be used to better measure overnight trade. When the intervals are set to a day, you may measure overnight trade movement by comparing the closing price of one day to the starting price of the following day.