What is the meaning of pre-market trading?
Pre-market trading is trading activities (buying and selling securities such as stocks, currencies, futures,etc.) that happen before normal market hours. The pre-market hours are only 30 minutes in the United States. The pre-market hours are between 9:00 AM – 9:30 AM EST.
Stock market hours in the united states
- Pre-market hours: 9:00 AM – 9:30 AM EST
- Normal market hours: 9:30 AM – 4:00 PM EST
- Aftermarket hours: 4:00 PM – 6:00 PM
Benefits of trading during pre-market hours
There are a lot of benefits of trading in the pre-market. This is the time a trader can take advantage of market activities. You can set up your trades in the pre-market or learn how you will trade once the normal market hours start.
The following are some of many benefits of trading during the pre-market hours.
- You will take advantage of news in the stock market such as earning releases since they sometimes happen before the market opens. These earning releases can also happen in the aftermarket. You will benefit from stock and securities’ morning spikes before the market opens.
- You will avoid major losses by exiting your positions before the market opens. For example, you can sell your shares if something happens in the market that could trigger a major selloff in normal trading hours.
- You can react to foreign markets’ actions and allocate your assets accordingly.
Disadvantages of Pre-market trading
You probably don’t want to trade during the pre-market if you are just getting starting with trading. Market conditions in the pre-market are completely different and riskier than normal market hours. If you are not careful or don’t know what you are doing, you could lose a ton of money in a matter of seconds.
The following are some of the disadvantages of trading in the pre-market hours.
- Lack of liquidity in the market
- Capturing small gains on securities that will have higher gains in normal market hours.
- You face extreme volatility
- It can take longer to fill your orders
- Pre-market hours are more restricted. Many brokers only let you place limit orders which are sometimes hard to fill
- You face unlinked markets. There is a lag in price updates from one market to another. This is due to the uneven distribution of information and inefficiency in the market.
- You could face bad news in the markets such as bad earning release
- Wider spreads.
- There is not enough trading volume
- Few choices to choose from. If a stock price is not moving, you will not trade it.
Final Words
Are you interest in trading in the pre-market? If so, you must understand that there are a ton of risks than rewards for inexperienced traders. This is why brokers restrict premarket trading activities.
Start by trading in normal market hours and learn the rules of the game. High volatility, spreads, and low liquidity will wipe you out of the market.
I am not saying that you will never make a profit in the pre-market. Instead, I am saying that you must learn first. Learn how to set trading rules and follow them. This is because the only thing that works during pre-market trading is rules. Yes, rules determine winners and losers.
Get ready and have your sit-belt on. You are about to have a bumpy ride in the pre-market.
