Does the early bird get the worm? That’s one possible argument for premarket trading…
Here’s the better question: Why would anyone trade outside of regular trading sessions?
Maybe you’re looking for a way to find trading opportunities outside of regular market hours. Or you think you want to trade overseas markets…
Perhaps you like the idea of entering and exiting a profitable trade before you’ve had breakfast.
Those are all great reasons to learn more about premarket trading … but it’s also smart to know more about what can happen in the markets before the trading day officially begins each day.
Premarket trading is a goldmine for some traders and a minefield for others. In this post, we’ll help you better understand premarket trading, how to do it, and the risks…
Let’s get to it!
Table of Contents
What Is Premarket Trading?
Premarket trading is the stock exchange trading activity that occurs before the market officially opens for its regular session at 9:30 a.m. Eastern.
Traders can use premarket activity to look for niche trading opportunities. They might hunt for premarket runners or try to jump on a news catalyst stock before other traders.
Premarket Trading Hours
Both the Nasdaq and NYSE allow 5 hours and 30 minutes of premarket trading before the official session starts.
What time does premarket trading start? Premarket trading can start as early as 4 a.m. Eastern.
What time does premarket trading end? Premarket sessions end at the market open, 9:30 a.m. Eastern.
For traders looking for premarket trading setups, that likely means rolling out of bed for an early start (depending on where you are). But the early bird gets the worm … right? That depends. We’ll dig more into that in a bit.
How Does Premarket Trading Differ From Regular Session Trading?
The premarket session is much trickier to trade than the regular session. That’s mainly due to the lack of liquidity and trading volume in the premarket. There just aren’t many traders at their screens ready to buy and sell.
The lack of liquidity and volume means that the bid-ask spreads are wider. That can make it very expensive if you need to hit a bid or offer to exit a trade suddenly.
The lack of liquidity also means that when a stock does get volatile, maybe due to a news story, a little buying or selling pressure can make the stock price move more than usual. These are what we refer to as premarket runners.
In regard to order types, you can only place limit orders. Market orders aren’t allowed premarket. That’s due to the exchange not wanting big traders to smack the price around too much.
The orders you place are also only valid for that current premarket session. When the regular session opens, the orders you placed will be canceled.
Overall, you should know that premarket trading is riskier than regular session trading. It’s all too easy to get trapped in a position with no way out.
Premarket vs. After-Hours
Apart from the premarket and regular trading sessions, there’s also an after-hours session.
The after-hours session runs from 4–8 p.m. Eastern.
The after-hours session is similar to the pre-market session: there’s not a lot of liquidity and the bid-ask spreads are generally wider.
Active stock traders generally find more opportunity in the premarket session compared to the after-hours session. That can be because of more company announcements, news stories, and overnight action.
How Do You Buy Stocks in the Premarket Session?
Placing trades in the premarket session is as simple as having a broker than allows premarket trading.
If you’re just getting started, here’s a post to help you select your first brokerage account.
Depending on which broker you use, you may have to pay different fees to trade premarket. Or you may only be able to trade restricted hours. Make sure to check your broker’s policies before you dive in.
Benefits of Premarket Trading
Trading in the premarket session can allow you to enter a trade before the masses rush in and push the stock price up or down.
Why would you want to do this? Maybe a company has a huge news release early in the morning … before most traders wake up and get to their screens. So there can be the first-mover advantage…
Also, watching for premarket movers — stocks that make big premarket price moves — can help traders get an idea of what might happen in the coming regular session.
So even if you don’t trade the premarket session, it can be smart to keep an eye on it. It’s one more way to stay in tune with the market.
Why We Love Premarket Movers
Premarket movers are the stocks that put in large moves in the premarket session. This may be due to news stories, earnings announcements, large order flow, or social media buzz.
Here’s what’s key for skilled traders: these large premarket moves tend to be driven by emotion. So the prepared trader with a solid plan and the right mindset can ride the momentum.
For example, maybe you could see a stock that trades at $10 sell off to $8 in the premarket session. That may be due to a trader liquidating a large position.
As you watch this happen, you see that there’s positive news out for the day. So you hypothesize that the sell-off is due to that trader’s desperation and need to get out quickly. You decide to pick up 500 shares. Once the market opens, the stock makes its way back up to $10. That’s all hypothetical, of course. But it could be a quick profit.
These are the kind of moves and setups we look for each day in StocksToTrade Pro, our elite trader education community. If you’re looking to take your penny stock trading skills to the next level, come and join us at StocksToTrade Pro!
Risks of Premarket Trading
Trading well involves managing your risk intelligently. And to manage your risk, you need the ability to exit your position if things go south. To do that quickly, you need liquidity. And there’s not always much of it in premarket sessions.
For example, say a biotech ticker releases a hot news story at 7 a.m. You feel confident it’ll go up, so you buy 1,000 shares at $7.50. The stock rockets up to $7.80 within the next 20 minutes … You’re feeling pretty good. Until suddenly, no one’s buying the stock.
You watch as the offer price drops, slicing through your entry price and all the way down to $7. Now you’re losing money. Naturally, you want to exit the trade. But there’s no one there to buy your stock.
Again this is all hypothetical, but it can happen. It’s a general example of what can go wrong when trading in the premarket session. But don’t worry — later in this post, we’ll share some tips and techniques on how to manage premarket risks.
Trading Opportunities for the Premarket Session
Wanna dive in and look for setups in the premarket session? Here are a few things you should look at to help you find the best opportunities for your strategy.
Company Earnings Announcements
When a company releases earnings, it can cause the stock price to make a sharp move up or down. These sudden price moves are often larger when it happens in the premarket session … that’s due to the lower liquidity we just talked about.
Earnings season comes four times per year — in January, April, July, and October. These are the times of the year when it’s smart to put in the extra effort to find these setups.
How do you find premarket earnings announcements? It’s much easier when you use a news scanner to track a list of your favorite stocks. You can do that easily with StocksToTrade. Check it out with a 14-day trial for just $7.
Overnight Market Action
The global financial markets generally move in waves. And what happened overnight in the European and Asian markets can affect what happens in the American markets the next day.
That’s why it’s common for traders to check the overnight market action first thing in the morning, then look for stocks that could move based on that information.
For example, say China announces a plan to start buying more American soybeans. That should be bullish for the price of any soybean-related stock. Savvy traders might find great setups based on that.
Early Morning News Catalysts
News catalysts include just about any news story that could affect a stock’s price. The news may be about the company or the industry. It could also be broader. Think economic or political news … or even regulatory.
For example, say a company’s CEO is arrested for fraud early one morning. This would be a major news catalyst for the stock, but catalysts aren’t always that dramatic.
News catalysts in the early morning session can have an exaggerated effect on a stock price. Sometimes these moves can make for great trading setups … but remember that lower liquidity in the premarket session.
To watch for news catalysts in the premarket session, it’s a great idea to use a news scanner that can help you keep up with high-impact stories. StocksToTrade has this feature built in, and it’s super easy to use. Try it today! A 14-day trial is just $7.
5 Tips to Improve Your Premarket Trading
Premarket trading is definitely riskier than normal session trading. But it can come with some niche trading opportunities. Are they right for your trading style?
Only you can answer that. But to help you understand how to trade in the premarket, here are five handy tips…
#1 Try to Trade Only With News
Trading in the premarket session can be expensive. First, you may pay a higher commission rate. Be sure to check with your broker about any premarket fees. Second, you’ll pay a higher bid-ask spread if you need the transaction to go through quickly.
If you enter a stock that doesn’t move and later exit the trade, you can churn your capital away on the spread and commissions.
So you want stocks that are more likely to move. How do you find them? Look for news! It’s a good idea to only buy a ticker premarket when it has a powerful news catalyst.
#2 Keep Your Trading Size Small
Maybe in nature it’s good to be a big fish in a small pond … but that’s definitely not true when it comes to premarket trading.
If you trade with reduced premarket liquidity, it’s wise to trade a number of shares that allows you to be nimble. You want to have enough liquidity in case you need to exit the position.
Make sure to look at the number of shares sitting on the bid and ask. Keep an eye on the number of shares being traded. Try to trade an amount small enough that won’t spook the market if you have to exit in a hurry.
#3 Look for Stock Trading Halts
Exchanges often place a halt on the trading of a stock when a company has some regulatory issues. It can also be if a news announcement is expected or there are discrepancies in the orders. A halt is temporary.
But if a stock halts, it’s important to note that any order you currently have to buy or sell may be canceled. So if you have an order to exit your position, keep an eye on the stock when its trading resumes.
Is it possible to benefit from a trading halt? Maybe. The reason for the halt can spark a move … So it can be smart to look for trade setups in recently halted stocks.
#4 Watch Level 2 Quotes Closely
The Level 2 quotes are about as close to the frontline as you can get in the stock market. This is where you can see the actual bid and ask orders and the number of shares being transacted in real-time.
It’s common for most day traders to watch Level 2 quotes, especially when a stock is at a key level, or they’re ready to enter or exit a trade.
If you’re gonna trade in premarket, it’s a good idea to keep a close eye on the Level 2 quotes. You’re not just looking for price movement, you also need to track trading volume and liquidity. You don’t want to get stuck in trades…
#5 Be More Selective Than Usual
If there’s one general philosophy for premarket trading that every trader should trade by, it’s that you should be like a sniper. Pick the very best shots when everything lines up perfectly.
The premarket session is less forgiving than the general session. You’ve gotta be more selective.
In the general session, if you enter a not-so-great trade, you can often turn around and exit the position easily. If you try to do that in the premarket session, you may find that you’re stuck. You even see the price run aggressively against you.
Use StocksToTrade for Premarket Trading
Trust me on this: If you’re gonna trade in the premarket, you want to have the right tools for the job.
You need an easy way to enter orders, watch the Level 2 quotes, keep an eye on the charts, and scan for news stories and earnings announcements.
That used to mean you’d need a number of clunky programs and websites. That was back in the old days. And to be honest, those days sucked. Thankfully, you can now use the StocksToTrade platform to handle it all.
With StocksToTrade, you have access to charts, quotes, scanners, news, and social media mentions for just about every stock traded in the U.S. And it’s all in one easy-to-use platform.
It’s no accident that many of the world’s best traders choose StocksToTrade. But see for yourself — get your 14-day trial for just $7!
Conclusion
Premarket trading can mean opportunities for traders outside of regular hours … But you’ve gotta know all the risks.
There are fewer traders active in the markets before the general session. That means the liquidity and volume can be pretty tight. So it’s often harder to enter or exit a trade. And you can risk pushing the stock price around if your position is too big.
On the other hand, the lack of liquidity can mean that when a stock does move, it goes ballistic. That could allow savvy traders to profit.
If you’re gonna trade in the premarket session, make sure to take it slow. Be very thorough and selective — follow the tips above.
If you’d like to hear my comments on premarket movers as the market opens each day, then come and join StocksToTrade Pro. You can interact with our community in chat, watch educational webinars, and see how I trade each and every day.
What do you think about premarket trading? Do you ever do it or does it sound far too risky? I’d love to hear your thoughts, leave a comment below!