What Is After-Hours Trading?
After hours trading can be thought of as buying and selling securities that are open to trading after the closing time of the major exchanges. Trading in the after-hours is conducted through electronic communication networks (ECNs).
These networks provide instantaneous liquidity for securities and can execute trades in a fraction of a second.
Understanding After-Hours Trading
1. The Spark
After-hours trading is the rapid buying and selling of stocks after the closing bell rings. Some investors keep evening hours to monitor their investments, while others may take advantage of the volatile trading caused by late-breaking news.
Spikes in market volume over a stock’s initial release announcing significant news have been historically followed by a substantial dip in volume as the session progresses, exchanges close, and investors go home.
The patterns we see in the market are often predictable. A spike in one stock followed by a decline in another tends to confirm a trend. However, unexpected events can also cause markets to rise or fall dramatically.
This is why it is important to know what to look for in an after-hours trading report. After a big rise or fall, a report that states the opposite of what you expected may be the sign of a great opportunity for your stock.
After-hours trading is risky for many reasons, but one of the largest risks is that there are not enough people participating in after-hours trading to make it an efficient market. The fact that the number of participants is limited can cause prices to fluctuate wildly.
A stock can fall sharply after-hours and rise when the regular trading session resumes the next day. Many big investors have a different view of the price action during the after-hours trading session.
Understanding how the market works and why some stocks go up and some go down after hours can benefit trading. After-hours trading can be beneficial because there is less liquid information available than in other trading sessions.
There are also some psychological benefits to understanding the market. Also, learning about after-hours trading can give you some ideas about how to utilize different strategies in your trading and changes in your mindset that could help increase your profits.
Risks of after-hours trading
1. Pricing risk
In some cases, your broker may limit your access to certain data sources. In other cases, after-hours access might only be available to a select few brokers and traders.
This is simply one of the risks associated with after-hours trading. There are no guarantees that the price you pay for an exchange – or any other asset or security – will always be available after-hours.
2. Liquidity risk
After-hours trading involves large-scale liquidity and risk. But it’s a small price to pay for increased liquidity and reduced latency when you can access knowledge that is not readily available to you during working hours.
One of the challenges of after-hours trading is that so many factors can affect prices. If you’re experienced dealing in this type of market, it can be much easier to navigate but still very volatile.
There will always be people who are more informed about prices than others, and these people will be able to read omens correctly. Ultimately, there is no specific way if you want to make money after-hours in your chosen field of endeavor.