Traders have developed various techniques and methods for trading, with optimal trading windows crucial for major company announcements and updates. After-hours trading allows traders to capitalise on exclusive news announcements and make significant gains. However, this concept can be complex.
What Does After-Hour Trading Refer To?
Financial markets have the following trading-hour periods:
- Pre-market. Pre-market trading occurs between 8 a.m. and 9:30 a.m., with early openings possible. Traders log into their brokerage accounts to look for market opportunities, especially during trading day reports. They place limit orders through brokers, which can be specific to the pre-hour trading criteria. Thus, brokers like Schwab allow limit orders to be placed between 8:05 p.m. ET and 9:25 a.m. ET for execution between 7:00 a.m. ET and 9:25 a.m. ET.
- Regular market. Most global stock exchanges operate during regular business hours, typically local time. Regular market hours, from 9:30 AM to 4:00 PM, are the most active, allowing retail traders, investors, and brokers to make decisions based on financial news.
- After-hours. Trading begins at 4 p.m. U.S. Eastern Time, after major stock exchanges close, can last until 8 p.m., with volume typically decreasing earlier.
Financial news and reports are typically announced on pre-market or after-hours to prevent fluctuations from increased trading activities. This ensures smooth trading.
How to Use After-Hours Trading Strategy?
Previously accessible only to institutional traders, wealthy investors, and financial firms, new platforms and advanced brokerage systems have opened the after-hours market to more participants. This allows traders to capitalise on corporate and financial news and gain a competitive edge.
After-hours traders make decisions based on news such as organisational structural changes, financial reports, IPOs, and corporate announcements before retail traders and investors engage in trading.
Trading during after-hours differs from regular trading as it requires ECN software, which connects users with major brokerage firms or institutions with access to after-hours trading, unlike using a conventional trading platform or directing through Nasdaq.
ECN protocols enable market orders and after-hours trading, but they have the following limitations:
- Market limit orders cannot be transferred to the next open session, so they must be executed within a single session to avoid invalidity.
- Corporations and issuers set order prices to prevent traders from capitalising and manipulating the market by executing massive orders to swing the market in their favour.
Limitations are essential for maintaining financial market integrity and preventing excessive stock buying and selling by big players to accumulate wealth.
Let’s have a case study example of after-hour trading.
Let’s assume that Google introduced a new product utilising advanced artificial intelligence technology that could significantly boost its market position and research and development leadership, potentially becoming a significant revenue source.
The imaginary news, likely to occur after hours, can be capitalised by those with an ECN platform trading account. They can buy Alphabet (Google) shares and observe the stock price increase during regular trading hours, maximising their profits by having exclusive market access.
After-hours trading provides traders exclusive access to significant corporate and financial news before the market reacts, potentially leading to significant gains. However, this trading requires specialised platforms like ECN software and has specific limitations to ensure market integrity and stability.
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