Activity on the stock market does not cease once the closing bell is rung. Before and after the normal period, assets still change hands. In the morning, pre-market exchange transitions into the official hours. Experienced players buy and sell futures that have impressive profit potential.
It is not mandatory to start trading in these preceding hours. However, there are opportunities many players don’t want to miss. If you are used to day trading, consider starting earlier. Here is an overview of the benefits and drawbacks of this arrangement.
When Trading Never Stops
For futures, exchange occurs around the clock. Naturally, the largest volumes are traded within regular hours. When exchanges in New York and London are open, major institutions execute a lion’s share of their trades.
Volume and movement accumulate close to the opening time. This is 9:30 EST (Eastern Standard Time). For example, take E-mini S&P 500. Its volume starts rising before the official hours — around 8:30 on average. In an hour, both volatility and volume will have already started growing. Usually, the trend continues for a subsequent couple of hours. This explains two benefits of starting early:
- Pre-market positions allow you to foresee changes in the open marketplace.
- Fewer competitors are there to snatch trades.
However, users of online forex brokerage should also be aware of the downside.
Is There a Catch?
The approach has its own flipside — modest volumes. You may identify a promising opportunity but be unable to use it. This is because the volume could be insufficient. In general, however, at least a couple of opportunities may be spotted from 8:30 to 9:30 am. Therefore, if you are a day trader who is active in the opening hours, adopting pre-market makes sense.
What to Look Out For
Make it a morning habit to check the economic calendar. Do this every single day, as tonnes of valuable data are released in the early hours. Time your positions under big news releases. Here is how this should be done.
Exit all of your positions at least a minute before. Avoid opening new ones within the 5 minutes before the release. Once dramatic information is made public, markets react. As a result, price gaps emerge, and risk management becomes paramount.
Another peculiarity is the scope of effect. As volumes are relatively modest, influence is much stronger in comparison with regular hours. Watch for a valid trade setup before commencing any activity.
What Trading Methods to Use
There is no need to modify your regular trading behaviour. The same techniques that work for you during normal hours could be just as effective. However, it is important to understand a few caveats.
First, do not rely on pre-market as a predictor of subsequent activity. In fact, your impression may be deceiving. Here is how it may impair your judgement.
If futures you focus on will fall in the pre-market, you may feel pessimistic. However, there is no guarantee that reversal will not be observed right after the opening. A fresh stimulus may send the prices up. Similarly, stocks that rise in the pre-market may cease or continue growing afterwards.
Holding Positions Through the Open
There are conflicting opinions on whether positions should be held through the open. Some experts will instruct you to finalize any pre-hours trades. Others will call this nonsensical. Here are the two most common methods.
First, you could hold your trades through and hedge risks. This involves placing a stop loss and a target. Avoid taking action until either of these is activated. The indicators are as likely to be hit as in any other situation. A very close stop loss may not be favourable. In case of a dramatic surge, it will be quickly triggered.
The second approach is timed even more rigorously. All trades open before 9:30 am must be exited at 9:29. The one-minute time gap is enough to minimize risk. The same logic is followed by traders closing positions before data releases.
What Should You Choose?
There is no universal recipe. Try out both methods and see which one suits you. Keep track of the profits reaped in the early hours. Compare positions closed before the opening and held through it.
A thoughtful approach takes time and patience. However, the importance of data collection may not be overlooked. Therefore, keep at it for several months. This will ensure your conclusion is solid.