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- What Is After Trading Hours? Should It Be A Part Of Your Trading Strategy? - April 16, 2019
After-hours trading or after trading hours is a term you as a trader online might have come across a lot. If you are curious about what it is and how it works, you will find your answers here.
What Is After Trading Hours?
Normally, the trading hours for a stock market are 9:30 a.m. to 4.00 p.m. ET. You have guessed it right. The trading session that starts after the market closes is known as after-hours trading. So basically, you will still be able to buy and sell stocks after the regular trading hours or when the market closes.
How to Trade during the After- Hours?
You must be wondering how are trades executed when the exchanges are closed? It’s possible via computerized order matching systems known as electronic markets. These are like electronic stock exchanges. But it’s just a service that matches buying and selling orders. For instance, if you place an order to buy 100 shares at $20 each, the computer will search for an order to sell at least 100 shares at $20. If it manages to find one, then your trade is successfully completed. If not, the order is not filled. You can start placing a trade order after 4:05 p.m. but it will only execute after 4:15 p.m. The commission and settlement time is the same as that for a regular session.
You must understand that there are a number of differences between regular trading and after- hour trading. For example, not all order types are accepted, you see limited buying or selling orders and you can’t place stop limit orders or orders with special conditions.
Who Is It Meant For?
Wondering if you are eligible for after trading hours? Well, most online brokerage accounts allow that. So, you will have to check with your brokerage account. You will need a direct access broker to route your trading activities to an electronic stock exchange.
Should It Be a Part of Your Trading Strategy?
To be honest, after trading hours can be risky. Often, you will see large moves in the stock prices based on news releases that start coming out once the market closes. If you really want to take advantage of the price moves, make sure you have access to reliable news.
Perhaps the pros and cons of after trading hours will let you decide if you should include it in your trading strategy. Let’s start with the pros:
- It’s convenient: It gives you extended access to the market. So, if your schedule doesn’t allow you to trade during normal trading hours, this one’s for you. You can check out the current quotes and place a trade as per your convenience.
- React to a news event immediately: Companies mostly release their earnings after the regular session closes. This means you can immediately place trades for managing your position without having to wait for the market to open the next day.
- Act quickly to technical signals: If you are one of the traders who devise strategies using technical analysis, after trading hours can be very beneficial for you. Traders usually use closing price and volume figures for calculating trading signals. Once the signal is generated, you can immediately place the trade in the after-hours session without waiting for the market to open the next day.
Now let’s have a look at the cons of after trading hours:
- Non-consolidated quotes: During the regular session, the quotes you see are consolidated. These are actually the best available prices across trading venues. The quotes from the after-hours are not consolidated. The prices from one venue may not reflect the price of the same security displayed in another venue.
- Lower liquidity: Generally, when market participants are higher, more orders are available and the liquidity is great. This allows traders to execute the orders quickly at a competitive price. However, liquidity during the after trading hours is low. There are fewer participants available and this makes buying and selling of stocks difficult. Another problem is that some stocks are not available for trading at all.
- High volatility: As the liquidity in the market is low, the volatility is higher as compared to that of a regular session. Stocks tend to be more volatile when a major news item is released. The ups and downs in the prices might not be carried forward the next morning.
Whether or not to trade during the after trading hours depends on your risk tolerance, investment goals and of course, trading style. If you are a beginner, it should not be a part of your trading strategy. Keep in mind trading in this session is not for everybody even if your CFD stock trading allows it. The profit potential might be high because all traders aren’t active at that time. But the risk is always higher.
Featured image: Unsplash