Over the years, traders have developed a wide variety of techniques, and today’s individual investor uses a broad spectrum of methods and perspectives while trading. Locating optimal trading windows, during which major company announcements and updates are made public, is essential.
After-hours trading exposes traders to exclusive news announcements, allowing them to capitalize on major news and make significant gains.
However, this concept can be complex. Therefore, we will simplify it as the following.
Understanding After-Hours Trading
Financial markets have four trading-hours periods: Pre-market, Normal pre-market, Regular market, and After-hours. Each period has different characteristics, and trading markets behave differently.
Most trading activities occur during regular market hours, from 9:30 AM until 4:00 PM, when retail traders, investors, and brokers are active and make decisions based on financial news.
Financial news and reports are primarily announced pre-market or after-hours to avoid significant fluctuations resulting from increasing trading activities. This way, corporations ensure that traders are informed a few hours beforehand, resulting in a smooth trading volume and movement.
Trading in the after-hours period was accessible only to a specific category, including institutional traders, wealthy investors, and financial firms. However, introducing new platforms and advanced brokerage systems exposes the after-hours market to more market participants.
After-hours trading is an excellent way to capitalize on corporate and financial news and enjoy a trading edge over other market participants.
After-hours traders make decisions based on news like organizational structural changes, financial reports, IPOs, and other corporate announcements before retail traders and other investors engage in trading.
How To Start Trading in After-Hours Period?
Trading during the after-hours period might look similar to trading in regular hours. However, the significant difference is that you cannot trade using a conventional trading platform or directing through Nasdaq, for example.
Instead, you will require an ECN software (electronic communication network), which connects you with major brokerage firms or institutions that have access to after-hours trading in their nature.
Using this connection, facilitated by an ECN protocol, you can execute market orders and trade in the after-hours. However, there are some limitations when it comes to trading with ECN networks, including:
- Market limit orders cannot be carried to the next open session. Therefore, you must execute your orders within a single session; otherwise, your order will become invalid.
- Order prices can be limited, and you can only purchase or sell according to a given price. Corporations and issuers set their price limitations to avoid having traders capitalizing and manipulating the market and executing massive orders to swing the market in their favor.
These limitations are crucial to keeping the integrity of financial markets and maintaining the dynamics within acceptable ranges. Otherwise, big players will optimize this opportunity and excessively buy/sell stocks to accumulate wealth in their accounts.
Case Study
Suppose Google announced a new product development powered by advanced artificial intelligence technology. This introduction would drive Google’s position in the market and research and development leadership, making this product a cash cow for the company.
This imaginary news is more likely to occur during after-hours, and if you have a trading account connected to an ECN platform, you can capitalize on this opportunity. You can buy Alphabet (Google) shares and watch the stock price increase in the next regular trading hours, increasing your profits simply from having exclusive access to the market from this news.
Final Notes
After-hours trading offers a unique opportunity for traders to capitalize on significant corporate and financial news before the broader market reacts. By leveraging exclusive access to news announcements and updates, traders can potentially achieve significant gains. However, this form of trading is not without its complexities. It requires specialized platforms, such as ECN software, and comes with specific limitations that ensure the integrity and stability of financial markets.
