After Hours Trading

After hours trading was once something only achievable by big players in the investing world. Nowadays, anyone can access the opportunities and take advantage of the volatility demonstrated outside of LSE and NYSE market hours.

Whatever your instrument of choice, be it Tilray (TLRY), Square Financial Services (SQ), T Mobile (TMUS) or Disney (DIS), after hours trading requires some special consideration. This article provides an explanation of the concept, how it can benefit traders, what risks are involved and what strategies suit it best.

What Is After Hours Trading?

After hours trading sits outside of the main market sessions of big exchanges like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). The UK standard market hours are 08:00 to 16:30 GMT, with after hours trading occurring for a few hours on either side, consisting of pre and post-market sessions.

The UK pre-market session runs from 05:05 GMT to 07:50 GMT and the post-market session sits between 16:40 and 17:15 GMT. The American markets have increased their time limits for extended hours trading, offering five hours of pre-market trading from 4 am Eastern time (3 am Central Time, 8 am GMT).

Once the domain of wealthy investors and big financial institutions, technology improvements have given rise to ECN (electronic communication network) brokerages, which opens the doors of after hours trading to individual investors of all sizes. Alternative trading systems (ATSs) also offer after hours brokering opportunities.

After hours trading can be carried out on many different instruments, including stocks, indices and options. The specific instruments, however, will depend on what your broker offers.

After Hours Trading Strategies

There are two common strategies employed for after hours trading, known as news and breakout trading. Each of these capitalises on a different advantageous characteristic of extended-hours markets.

After Hours News Trading

Often touted as the primary reason for after hours trading in the first place, news trading is a strategy that involves rapidly reacting to economic reports and news releases. From massive American corporations like Exxon Mobil (XOM) & 3M (MMM) and UK financial services companies like Hargreaves Lansdown (HL) down to retail stores like Macy’s (M) and JCPenney (JCP), all must publicly release financial reports.

These financial reports, and their forecasts, can be used to inform trading strategies. For example, if market experts predict a positive turnover report for a company, but the report doesn’t meet expectations, the stock price is likely to go down. News traders would likely recognise this and short their stock. After hours news trading works in the very same way.

Breakout Trading

Another popular strategy in after hours trading, breakout investing involves assessing support and resistance levels for short-period swings. When the price breaks beyond one of these levels, you place a long or short order on the instrument to catch its breakout to a new set of support and resistance levels.

Pros of After Hours Trading

While after hours trading provides opportunities for profit in some situations, it isn’t for everyone. Ensure you understand the ins and outs of the concept and strategies before taking the risk.

Some of the main advantages of after hours trading include:

Volatility

After hours trading tends to see higher levels of volatility than regular hours, often due to the lower numbers of active traders. This causes more drastic price movements, opening the door to larger profit possibilities. However, volatility is a double-edged sword, so do be careful.

Convenience

Some traders may lead very busy lifestyles that block out the main market hours from their trading time. After hours trading opens more of the day to trade, allowing busy investors to stay involved.

Similarly, stock markets in other economic areas, such as the USA or Japan, generally have inconvenient opening times for UK investors. Trading after hours allows cross-market trading without needing to work at inconvenient times of the day, so those looking to trade indices like the NASDAQ 100, S&P 500, the DOW and 10-year treasury or stocks like AMC and KMI in the UK, can easily do so.

Opportunity

With most investors and day traders utilising the main market hours, those willing to take the risks of after hours trading are presented with greater opportunities. With some news and reports being released in these after-market hours, traders can react more quickly and get involved in the initial price swings.

Cons Of After Hours Trading

Unfortunately, it is not all plain sailing. If these advantages over main sessions came with no additional risks, everyone would do it. After hours trading best suits those with more adventurous risk appetites for the following reasons.

Low Liquidity

As with many things, the advantage of fewer traders providing more opportunity comes with its own disadvantage. Fewer investors trading in equities and derivatives means that the liquidity of the markets is lower after hours. Traders in these times are less likely to get their price quotes matched, as fewer traders are filling out the other sides of orders.

Greater Volatility

While larger price movements provide more profit opportunities, the volatility also increases the risks of losses. Dramatic price swings go both ways, so be prepared for shock losses and utilise limit orders where you can.

Increase Cost

As liquidity decreases and volatility increases, the market spreads generally increase. Therefore, with the general volatility and liquidity trends of after hours trading, spreads tend to increase. This can reduce the profitability of after hours trades.

How To Start After Hours Trading

Finding A Suitable After Hours Broker

The most important step to begin after hours trading is to choose a broker that supports it. For a broker to facilitate this, it must either be an ECN broker or an ATP broker, which are two different types of brokering structure.

There is a decent range of suitable brokers for after hours trading, and more are popping up all the time. Some of the most popular UK options for buying and selling after hours are Trading 212, IG and eToro.

It is generally beneficial to find a broker with a good demo account offering, allowing traders to familiarise themselves with platforms, instruments and strategies without any financial risk.

Other considerations include spreads, transaction fees, payment options and regulation. Some traders may also aim for a broker with a strong app platform, like Fidelity’s mobile platform. See our UK brokers guide for more detailed tips and reviews of good providers.

Strategise

Once an account has been set up and funded with a suitable broker, an after hours trading strategy should be selected, and you should begin to assess the markets. If you choose to follow a news trading approach, find out when the key report releases are for the instruments you wish to trade. You can then begin to research predictions and plan for trading these releases.

For after hours traders following a breakout approach, ensure you have got to grips with the fundamentals of the strategies. You can then practice on a few real-time breakouts, ensuring you understand fully and are correctly implementing the strategy. Breakout trading can also benefit from a range of technical indicators, including Bollinger bands and fake-out tools.

Top After Hours Trading Stocks For UK Traders

It can often be helpful to see what the general trading population are doing when getting started in a new financial venture. After hours trading is one such venture; beginning with popular stocks will improve liquidity, helping to maximise your profits while you build a foundation of understanding and experience in the sector.

Top UK Stocks

Some of the most traded stocks on the London market are Lloyds (LLOY), Barclays (BARC), Vodafone (VOD) and Nokia (NOKIA).

Top US Stocks

In early 2021, the three most traded after hours stocks on the NYSE are Cisco Systems Inc. (CSCO), Micron Technology Inc. (MU) and Discovery Inc. Series C (DISCK). Also among the top ten are Apple (AAPL) and Microsoft (MSFT), with other noteworthy stocks by volume including GameStop (GME), Tesla (TSLA) and Amazon (AMZN).

To find more information about after hours trading volumes, market gainers and biggest movers, there are plenty of screeners, such as CNN, and trackers online with live charts and graphs, data tables and stock history. These screeners are split between UK and US markets, with the results generally updated the next day, meaning yesterday’s information is published today.

Additional Resources

There are plenty of extra resources available online for those interested in finding out more details to do with after hours trading. YouTube contains a wealth of videos you can watch with well-explained definitions of different strategies, rules and trading opportunities. Beyond traditional guides, there are also interesting articles debating whether after hours trading is unfair and should be illegal, given the low liquidity and potential for market manipulation.

Final Word On After Hours Trading

While some institutions and journalists debate whether after hours trading is good or bad for markets, affecting opening prices in ways that are not fair for regular traders, there is no doubt that it offers financial opportunity. For those with suitable experience, capital and risk appetite, analysing price movements and trading UK and US stocks outside of their exchange’s hours provides added volatility and profit potential. Traders should always be careful, however, ensuring strategies are understood and safety nets are in place in case the market moves against you.

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