How to Trade After Market Movers

Mon May 23, 2022, 06:43 pm | by Dan Schmidt | No comments

Just because the bell on Wall Street rings at 4 pm ET to signal the end of market hours, doesn’t necessarily mean trading is done for the day. In fact, it usually means things are about to get interesting as company earnings data rolls in and after market trading begins.

Like IPO investing, after hours trading used to be primarily the playground for insiders, institutions, and accredited investors. But now, more and more brokers are opening pre- and post-market trading to retail investors, who can now trade for 16 hours a day if their broker allows it. Here’s how after-market trading works and how to benefit from trades placed after the closing bell.

What is After-Market Trading

The opening and closing bells on the New York Stock Exchange are just another grandiose bit of pomp and circumstance from Wall Street. The closing bell might be a ‘pencils down’ moment for some traders, but many can easily gain access to the market after 4 pm with a few simple requests.

After hours trading begins at 4 pm and ends at 8 pm (the latest). When and how often you can trade depends on your broker – Robinhood lets clients trade stocks until 6 pm with after market trading enabled while Webull allows clients to go all the way until 8 pm before shutting things down.

Trading happens a little differently during this time than regular market hours. Since volume is low and volatility is high, only limit orders can be placed to buy or sell shares. Additionally, some brokers won’t have all available shares ready for after hours, so be sure to check out the FAQ section on your broker’s website to learn their rules regarding pre- and post-market trading.

Why Trade After-Market

You may be asking, if volume dries up after hours as most traders pack their bags and head home, what are the benefits of trading after hours? Well, lack of volume doesn’t create a lack of large moves, especially when earnings season rolls around. Here are a few big reasons why after hour trading is popular:

  • News or Earnings – Companies report earnings either before the market opens or after it closes, never during the open session. News on drug trials or other important public stories also tend to be released around this time. With after-market trading, you don’t have to wait until the following day to take advantage of a promising earnings report or successful drug trial.
  • Enhanced Volatility – Trading after the bell is usually done by sophisticated investors with lots of capital at their disposal. So while the volume disappears after hours, the volatility does not – especially when earnings surpass or fail to meet expectations.
  • Chance to beat the crowds – After hours trading provides a window to jump in on stocks before the masses. If you’re researching stocks and find a promising trend that could explode the next day, you don’t have to wait and fight the crowd for shares – just buy in the post-market session. You’ll be able to get the jump on the news and get your shares at a price you want instead of battling the crowd the next day.

How to Find After Market Movers

Finding stocks to trade after hours isn’t much different than your search during normal market hours. It might be more difficult to utilize technical analysis due to the lack of volume, but there are still plenty of ways to locate potential winners.

  • Research the companies you are interested in buying. When do they report earnings? Are they announcing any new products? Are they hosting an Investor Day? Announcing drug trials results? Know the key dates and potential products in the pipeline so that you can take advantage during the post-market session.
  • Use a scanner or a screener to find stocks making moves. Benzinga Pro’s Movers feature is one such screener, but many others exist as well. Use a screener that can help you find stocks with unusual volatility or volume.
  • Sometimes the biggest movers will be the most obvious ones: large companies with tremendous volume that report better or worse than expected earnings. Earnings beats or misses are the usual cause of large after-market moves, so don’t just memorize the dates of earnings releases, but also know the consensus expectations for the company. A big earnings beat could send shares soaring and if you’re trading after hours, you can get on the wave right as it begins to form.

Pros and Cons of Trading After Market

Is trading before and after market hours a golden ticket to stock profits? Yes and no. It’s true that larger moves tend to take place before and after the market opens. Buying the open and selling the close hasn’t been a very profitable strategy over the years, but after hours trading has its downsides as well. Here’s a list of pros and cons:

Pro: Immediate action – Investors and trading with access to after market trading can immediately trade news that gets released after the bell instead of waiting until the following morning. This allows traders to get in before the large moves occur; if you wait until the next day to buy, you could wind up missing a sizable portion of the move.

Con: Limited liquidity and half-filled trades – Every trade requires two parties: a buyer interested in purchasing shares and a seller who’s willing to unload them. Matching buyers and sellers is usually no problem during open market hours, but when volume falters in pre- and post-market trading, finding a counterparty can be tricky. Not only could this result in a lack of demand for your shares if the stock is small and illiquid, but you could only get partial order fills because no counterparty exists to complete your trade in full. Be cautious when placing large after-hours trades – you might not find someone willing to play ball on the other end.

Pro: Outsized profit potential – Let’s not bury the lede here, after hours trading is appealing because of the potential for huge profitable moves in a short amount of time. Day and swing traders look for volatility to make profits and stocks trading after the bell are as volatile as it gets. If you buy right as a great earnings report is released, you’ll wind up with a much more profitable trade than someone who waits until the next day to buy.

Con: Spreads and competition not in your favor – You know who else trades in post-market hours? Large institutions, wealthy investors, and sophisticated technical traders – aka the stiffest competition in the market. And not only does the competition get more fierce, but trading gets more expensive as bid/ask spreads widen due to the lack of volume. Can you handle increased trading costs AND expert competition?

Final Thoughts

After-hours trading today can be accessed by millions of investors who previously were locked into trading between 9:30 am and 4 pm EST. It’s not just insiders and institutions who trade after the bell anymore, but the playing field is far from level. After-hours trading is wrought with risks not found during normal market hours – limited liquidity, higher spreads, stiff competition, and the potential that your trades are half-completed or not even executed at all. If you study the markets and are comfortable making trades based on earnings and news, after hours trading could be a place for you to supercharge your profits. Just be sure to understand the different risks that present themselves in the after hours.