Before the Bell
What is Pre Market Trading?
Pre-market trading, the exciting realm of trading that takes place before the regular market session, holds immense potential for savvy investors. Occurring between 8 a.m. and 9:30 a.m. EST each trading day, the pre-market session is a critical time for gauging market strength and direction.
During this exclusive period, limited orders can be executed through cutting-edge electronic markets like alternative trading systems (ATS) and electronic communication networks (ECN). However, it's important to note that market makers must wait until the 9:30 a.m. EST opening bell before executing orders.
Pre-market trading comes with its unique characteristics. While it tends to have limited volume and liquidity, leading to larger bid-ask spreads, many retail brokers offer pre-market trading options, although they may impose limitations on order types. Fortunately, several direct-access brokers provide access to pre-market trading as early as 4 a.m. EST, Monday through Friday.
It's essential to keep in mind that early morning pre-market activity is generally subdued unless there's breaking news. The liquidity is thin, with most stocks showing only stub quotes. However, index-based exchange-traded funds (ETFs) such as the SPDR S&P 500 ETF (SPY) can experience movement due to the trading in S&P 500 futures contracts.
Moreover, significant gap ups or downs in S&P 500 futures can influence the movement of widely held top holdings in benchmark indices. Stocks like Apple Inc. (AAPL) often see early trades as early as 4:15 a.m. EST.
Before pre-market trading became a phenomenon, after-hours trading took centre stage. The New York Stock Exchange (NYSE) introduced after-hours trading in June 1991 to compete with international exchanges and private exchanges that offered more extended trading hours. Over time, NYSE expanded trading hours to allow pre-market trading from 4 a.m. to 9:30 a.m.
Benefits of Pre-Market Trading
React early to overnight news: Pre-market trading empowers retail investors to respond promptly to overnight news before the regular trading session begins. Whether it's corporate earnings, major company announcements, breaking geopolitical developments, or news from overseas markets, staying ahead of the game is crucial. However, it's important to remember that pre-market reactions to news may reverse once regular trading volumes are reached.
Convenient for busy schedules: For the do-it-yourself investor, the flexibility to engage in pre-market trading is a major advantage. Not everyone can trade during regular market hours due to the demands of everyday life. Starting the day early and placing trades in the pre-market allows for a less hectic trading experience.
Gain a competitive edge: Savvy traders and experienced investors familiar with trading patterns can leverage pre-market trading to buy or sell stocks at more favorable prices compared to regular session prices. This advantage relies on accurate pre-market reactions to stock news and the stock's ability to fully discount the news during pre-market trading. Stocks that trend higher in the pre-market may continue to climb in the regular trading session, while those that trade lower could follow a downward trend.
Risks of Pre-Market Trading
Limited liquidity and wide bid-ask spreads: Pre-market trading has fewer buyers and sellers, resulting in limited liquidity, increased volatility, and wider bid-ask spreads. Volumes in the pre-market are typically a fraction of regular session volumes, making it crucial to consider these factors when executing trades.
Price uncertainty: Stock prices during pre-market trading may deviate significantly from regular trading hours. Differing trading volumes in the pre-market and regular sessions, as well as reliance on a limited number of electronic communication networks (ECNs), contribute to this price divergence. Regular trading hours benefit from multiple exchanges, ECNs, and market makers, ensuring better price discovery.
Limit orders may go unexecuted: In extended-hours trading, many brokerages only accept limit orders to protect investors from unfavorable prices. Limit orders are only executed at the specified limit price or better. While this feature provides price control, orders may go unexecuted if the market moves away from the limit price.
Institutional trader competition: Retail traders face a challenging playing field in pre-market trading due to the presence of institutional and professional traders. These experienced traders possess deeper pockets and access to better and timelier information. Novice traders should approach pre-market trading with caution and consider the odds stacked against them.
At Chump Profit, we recognise the potential of pre-market trading. However, we advise that only seasoned traders with the necessary knowledge and experience delve into this dynamic market. Understanding the nuances, accurately assessing pre-market reactions, and taking decisive action are key to success. Open the door to pre-market trading and unlock your trading potential with Chump Profit.