Pre-Market Trading Guide: How to Trade During Pre-Market and After-Hours

pre-market trading

What is Pre-Market Trading?

Pre-market trading is the period before the stock market opens in the morning, it typically starts as early as 4am EST for the most liquid stocks and ETF’s. Most stocks will start to see volume come into them around 8am. Pre-market ends at 9:30 AM when the stock market opens. The normal US stock market hours are from 9:30 AM-4PM EST. After-hours trading goes from 4PM-8PM EST. 

Size According to Liquidity

Trading during pre-market has its perils. One of the biggest ones is the lack of liquidity. This means that significantly fewer shares in volume trade compared to the market open. If you take too big of a position relative to the liquidity, you risk taking a massive loss due to slippage on volatile names. 

You can also only place limit orders (See definition here) during pre-market and after hours, so if a stock dumps, it makes it even harder to get out if it keeps downticking. Make sure to check how much volume a stock has traded in pre-market before you enter. 

If it’s a name with no news and no price action at all pre-market, it is a name you DO NOT want to trade during the pre-market. On names that are actually trading and trending during pre-market, do not to take a position that occupies more than 5% of the trading volume.

Be Aware of Wide Spreads

Spreads refer to the difference between the bid and ask price on a stock. The bid price is the highest price a buyer is willing to pay for a stock, and the ask is the lowest price a seller is willing to sell their shares on the open market. 

Since there is less liquidity during the market open, a stock will have wider spreads because there are fewer buyers and sellers. This means that you have to be smart about when you place orders to get filled, whether its a sell or a buy. You want to be selling/short-selling when the stock is rallying, and buying/covering on dips. 

You want to be doing this even during regular hours, but it is especially important during the pre-market on stocks with spreads. They can make trading a stock very stressful, especially if there is low volume, as you are sitting for minutes on the bid or ask waiting to get filled. I’d avoid trading illiquid stocks with wide spreads during pre-market altogether. 

Make a Plan for the Open

Once 9:30 am hits, volatility and volume will significantly increase in the stock you are holding. If you are holding a position from pre-market, you need to have a plan for how you will manage your position.

What will you do if the stock opens strong? What will you do if the stock opens weak? Where will you stop out? Where will you take profits? Will you take partial profits, or will you sell your whole position?

Everything will speed up. Stocks can rip 5-10% at the open. If you freeze up, you expose yourself to taking a massive loss. If you are up on your position from your pre-market entry and have some cushion, consider locking in part of your position right before the open, to avoid the pain of the stock completely reversing on causing your unrealized profit to evaporate. 

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