The trading day doesn't begin at 9:30 a.m. New York time, nor does it end at 4 p.m. Thousands of shares pass hands in the pre- and postmarkets, outside of normal business hours. Trading is tough enough when everyone else is doing it, so why get up early or stay late?
The bottom line is that you'll make more money and take smaller losses if you play well in the extended hours.
The pre- and postmarkets opened to the retail crowd during the height of the bubble. In prior years, trading outside the exchanges was limited to Instinet. The senior ECN (electronic communications network) was a private club back then, with participation limited to institutions. That changed when Island ECN offered the little guy a cheap way to trade into the dinner hour.
At one time, it was assumed world markets were headed into 24-hour nirvana, where liquidity would follow sunrises around the globe. The bear market ended that pipe dream, as volume dried up in the extended hours. Now, three years later, only liquid stocks and big news attract enough interest to light up trading screens before and after the bell.
But these times of day still offer tremendous opportunities. One after-hours strategy unloads long positions at higher prices after a rally or covers shorts at lower prices after a selloff. This is also a great time to pick up new positions, before the regular crowd bids them up or down.
I use the pre- and postmarkets more now than at any time in the past. The extended sessions are thinner these days, but they've also become the amateur hour. You can buy and sell at amazing prices if you pay close enough attention to news and sentiment. This is especially true after one side gets trapped when the closing bell rings.
Last Thursday the markets closed at new lows after many players expected a bounce. Minutes after the closing bell, Macromedia (MACR:Nasdaq - news - commentary - research - analysis) was being offered at 35 cents below the final print, and there was no news. This stock just broke out a week ago, and I'd been watching it for a pullback play. So I immediately stepped in and took those shares. It opened unchanged on Friday and kept going higher throughout the day.
Traders can sell short Nasdaq stocks without an uptick during these sessions. There's a lot of money to be made when your sale matches up with an overeager buyer. The danger lies in taking a position at the wrong price, because it could open much higher the next day. Often I'll send the short position back out after I get a good fill, hoping to flip it to weaker hands rather than waiting for the opening bell.
ECN hours vary, but most trading takes place from 8 a.m. to 9:30 a.m. and 4 p.m. to 6:30 p.m. Eastern time. I'm always up and active before 8 a.m. because those first trades can be way off the mark. It's amazing how greed and fear impose their will on weak-minded traders. Somehow I feel it's my duty to take their shares and teach them a valuable lesson.
A good practice is to keep one eye on the 24-hour Globex market during the extended sessions. Get this data at the Chicago Mercantile Exchange site if you don't have a better source. Overnight futures charts provide a set of support-resistance pivots, because many stocks move in tandem with the Nasdaq 100 or S&P 500 futures before and after regular market hours.
Extended hours can be very risky if you don't do your homework. Pick your spots carefully, or you'll find yourself in hot water when the market opens. Illiquidity often translates into a very wide bid-ask spread during this time. This built-in disadvantage demands an intuitive sense of support-resistance levels, as well as fast access to breaking news.
It's important to know the difference between hidden size and amateurs making bad decisions. Take a little stock, even 100 shares at a time, and see if it reduces the offer showing up on your trading screen. If the offer drops down, take all the stock and see if it goes away or refreshes. When big shares turn against you, get out immediately and look for a better opportunity. The best strategy is to trade with the hidden size and against the amateurs.
All direct access brokers offer pre- and postmarket trading. Some discount brokers let you do it, and some don't. If you're not sure about your broker, head over to its Web site and read the fine print.
The counterparty to your trade may bust it when it's too far away from the closing print. This falls under the category of an erroneous fill, and it can be contested by the wounded party. Island ECN considers a trade 20% outside the market price as an erroneous fill, so don't get giddy when you buy a $10 stock for under $8. This is especially true if the stock opens unchanged in the next regular session.
