How Does After Hours Trading Work And Should I Participate?

after hours trading

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What if you could trade stocks like Forex non-stop all night? Wouldn't that be awesome?

Trading in the middle of the night, trading in the morning, trading after dinner, whenever you want to trade, you just go into the market and make a trade.

I guess there wouldn't be anymore day trading, but that's not the point.

The 168-Hour Work Week

If we could trade stocks, just like Forex 24/7 nearly all week, we'd be running up against 168-hour work week, and nobody wants to do that. Heck, we don't even want to work 40 hours in a week that is the hole point of learning to trade for a living anyway right?

The reality is that institutions and exchanges have limited most of the markets activity to between 9:30am and 4:00pm trading time. That gives us a set of boundaries that traders have to work within. This is where most of the activity happens. But then there is after-hours trading.

What Is After-Hours-Trading?

Well, this is the time when you can trade after the typical market close. Traditionally, what used to be limited to just institutions and high net-worth individuals is now open to all of us. Yes, that includes you!

Did you even know you could trade in after-hours and pre-market trading? Well you can thanks to the electronic communications network, or ECMs. With the advent of the ECMs, it makes it a lot easier for exchanges to route orders and match up buyers and sellers in after-hours trading.

Typically after-hours trading is going to work just like the normal market would, only it will have some limitations compared to a traditional trading day. Just like the regular session in after-hours trading buyers and sellers will be matched up according to prices and exchanges will be made. Your account will see trades in after hours.

You won't see it all the time, but it has been done, and you can participate. Just check with your broker first to see if there are any extra fees involved.

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How Do The Orders Work In The After-Hours Market?

What about your orders? What if your orders don't get carried over? Do they carry over to the next day? Well not necessarily.

Some brokers have what are called "day orders" and those orders are only good for that day, probably including after-hours trading. If there isn't anybody who is going to match up with you in after-hours trading, then your order gets expired.

On the other hand, "good-til-cancelled" orders will stay working and can go beyond the same trading day and beyond after hours and into the next day. So if you want orders that are going to go beyond after hours, look towards orders like "good-til-cancelled."

4 Risks You Should Be Aware Of Before The Close

Here are four risks that you need to be aware of right now if you want to participate in the after-hours market. As a beginner in the stock market or options market, I would highly suggest that you sit on the sidelines and watch, more than participate. It's always better to understand later then get creamed right now!

1. Liquidity

Liquidity is a real issue in after-hours trading. It's not going to have the same volume and market size that a typical trading day will have, so you'll have fewer entries and smaller order sizes.

2. Small Fish

Being that you're an individual trader, you're going to be going up against mainly large institutions and companies in the after-hours market. They clearly have leverage and the ability to push you out of the market with their pricing.

3. Wider Spreads

Since there is low liquidity in the after-hours market, the spreads on most of your stocks are going to be very wide concerning the bid and ask. So make sure you understand where the stock trading because it can quickly rally away from you or fall away.

4. Volatility

As I mentioned in the previous three points, since there is low liquidity, a lot of institutional traders and very wide spreads, you're naturally going to have an extreme amount of volatility in after-hours markets. Not to mention that you should always check for earnings announcements or company news in the after-hours market. This can drive stocks higher or lower instantly after a company has announced something big.

Meet Me In The Comments Section (After-Hours)

So what do you think? Have you ever participated in after-hours trading? Do you participate in it now, or have you ever had a bad trade or a good trade that's gone your way? What is your opinion of after-hours trading? Add your comments to this post right now and let me know your thoughts.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.