Pre-After market trading?

Question

Hi all.

Just wanted few clarifications on premarket/after market trading. Are these recommended for amateur traders? For instance today I were able to get news on PHTN takeover at 7:40am and although I do not have a trading account went to aol finance site to check on premarket price(15 delay posting) and it was at $11.68. If I were trading and bid for it at that price would I have been able to get it. Similarly around 8:30am still in premarket, the price soared to $15.20. Does that mean I could have sold it at that price and made a 30% plus profit!

How is the after market price determined, supply and demand or other factors come into play. Does that after market price determine opening price for the following day.

it worth relying on premarket specially after perusing extensively through business wires for tips, breaking news, expected data etc? Is this a good starter strategy?

Your feedbacks appreciated. Thanks all.

Answer 1

The big issue with premarket trading in my experience is that the spread is often times very large.  There are exceptions to this, and this is when the stock is heavily traded in general (such as QQQQ or DIA) or that day (such as a stock that just came out with an earnings announcement).  Thus, if the spread is low, after hours trading should ideally be no different than during the day.  

Now, keep in mind that the premarket trading doesn't open where it left off the day before, but rather, where the current bid/ask prices are.  Thus, if a stock closed yesterday at 10 bucks, came up with stellar earnings this morning at 7:30, you'd expect the initial bid/ask to be above 10 bucks (as everyone, not just you, got this news).  Now, it is possible that the last trade for the stock this morning was lower than the pre-market bid/ask.  But it is the current bid/ask price that matters and tells what you can get for it now.  Thus, you wouldn't be able to pick it at 10 bucks pretrading.  Now, it is possible that if you premarket trade and you get the stock early in the day, you can appreciate the continued rise during the day of that stock (although you probably could have done the same by just buying it at market open).  However, the premarket trading could have also over-reacted (in particular, if the stock is very lightly traded).  If the latter is the case, then you would have been better off just buying the stock at market open.  

Bottom-line is that you should probably buy/sell stocks pre/after-market just as you would normally, keeping in mind everyone else has the news too.  Further, you should be careful of large spreads with the after-hours trading, as it reduces possible gains.  Hopefully this helps?

Answer 2

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Answer 3

I am cleared to do direct entry into the ECNs that operate outside of market hours and I seldom do this because of the lack of liquidity and the wide spreads.