If you are also wondering why yesterday the trading session closed at the same price, and before the opening of a new trading session the instrument price changed, then you are in the right place. Before the opening of the trading session, there is a gap called “Premarket“, and after the close of the trading session comes”Postmarket “or, as it is also called,” Aftermarket “.
The history of trading on the Premarket and Postmarket became widespread in 1991 due to the emergence of the possibility of using digital systems for trading in the stock market. Prior to that, only large funds and corporations had access to trading at the closed session.
Let’s take a look at what Premarket and Postmarket really are, and whether it is worth trading stocks during these periods.
Stages of a trading day on the exchange
To begin with, let’s define what a trading day on the stock exchange consists of. It is usually divided into three stages:
- Pre-market trading – the time period before the opening of the main trading session.
- Trading session – the time when the main trading on the exchange takes place.
- Postmarket (after-hours trading) – the time period after the close of the main trading session.
The time period for each stage of the trading day is determined by the exchanges themselves – information about this is given on their official websites. Let’s, for example, consider the opening hours of the NYSE:
- Premarket – 4:00 am – 9:30 am New York time (Eastern Daylight time, UTC-4).
- The main trading session is 9:30 am – 4:00 pm.
- Postmarket – 16:00 – 23:00.
It should be noted that companies providing brokerage services can, at their discretion, establish access to the Premarket and Postmarket, including the decision on the duration of these periods.
Features of Premarket and Postmarket
Now let’s look at the features of these unusual parts of the trading day, as well as analyze their advantages and disadvantages. Let’s start with Premarket:
Premarket is a morning trading period during which preliminary (limit) orders are placed in the order book (Level2). Counter orders at one price are immediately executed, and all the rest are carried over to the main trading session.
The purpose of the Premarket is to relieve the opening of trades and make it possible to determine the opening price of a trading instrument (the first buy and sell prices). The price is formed according to a special algorithm, which cannot be influenced by the trading participants.
Postmarket is an evening trade that takes place after the close of the main trading session.
The goal of the Postmarket is to determine the optimal closing price for all instruments that are traded on a given exchange. After the Premarket is closed, all unexecuted orders are deleted.
Pros of Premarket and Postmarket
- The ability to open a deal at a better price: a trader can place a limit order at the required price.
- The ability to open a deal by predicting the price movement after the release of news or reports. After the opening of trades, the price can take a sharp rise.
- In theory, big players can move the price in the direction the trader wants (but this is impossible to predict).
- The ability to close a position that was not closed during the main trading session.
Cons of Premarket and Postmarket
- Large players can move the price in the opposite direction favorable to the trader by entering the market with a large lot.
- Reduced liquidity, which is due to a small number of trading participants.
- It is impossible to see the volumes and prices of orders of other bidders.
- Increased volatility: movements can be 30% or more of the initial price of the asset.
- Extended spreads: can reach several thousand pips.
- Late execution of orders: the order will be executed only if there is a counter one at the same price.
- The presence of a price gap (gap) formed at the opening of a trading session.
The math-savvy reader has already realized that trading on the Premarket and Postmarket has more disadvantages and risks than advantages and benefits. And indeed it is. We examined the reasons in the examples below.
Trading on the Premarket and Postmarket: examples
To trade before the opening and after the close of the main trading session, traders use publicly available news and company reports, as well as insider information.
An example of trading on Premarket
The 123 company released its quarterly report at 8:30 am New York time, which says its net income is up 123% and its dividend payout will be increased several times.
From this we can assume that the shares of the “123” company may rise in price after the opening of the trading session. A trader who possesses this information can purchase the required number of shares on the Premarket and, in the event of a price gap (gap), make a profit almost immediately.
An example of trading on the Postmarket
The market participant, possessing insider information, assumes that the morning report of the company “123” will be positive, and after the publication of all the news, the shares may rise significantly in price. After the close of the trading session, the trader can place an order to buy a certain number of lots at a reduced price, and in case of an increase in quotes, make a profit immediately after the opening of trading.
The flip side of the coin is that if the information is not confirmed and the shares of “123” company fall in price, then the trader may lose part of the capital.
The trading strategies used on the Premarket and Postmarket can be classified as high-risk, and I do not recommend using them for traders and investors with little trading experience.
Also, the availability of insider information from a private trader can not always help in trading. It is imperative to take into account the fact that in some cases, the extraction and use of insider information may be illegal and punishable, this should be taken into account in your actions.
Trading before the opening and after the close of the trading session for private investors and traders is associated with increased risks. Deliberately or accidentally placed order can be executed at a disadvantageous price, which in turn will lead to losses. It is better to refrain from trading outside the main trading session.
In addition, it can be added that on the Premarket and Postmarket, large trading participants make transactions, whose orders are hidden from prying eyes and are revealed only after the transaction has been completed (dark liquidity). This adds to the risk that the asset price will go to the disadvantage of a private investor.