This article will explain what “after hours trading” is and the risks and benefits that come with it. Moreover, it will compare traditional after hours trading with that of its crypto counterpart.

What does it mean?

‘After-hours trading’ commences at 4 PM U.S. Eastern Time following the closure of the major U.S. stock exchanges. The after-hours trading session typically runs as late as 8 PM. However, volume usually diminishes much earlier in the session.

Trading in the after-hours is done by way of electronic communication networks (ECNs). These are computerized systems whose purpose is to automatically match buy and sell orders for securities within the market. It connects major brokerages and individual traders together so that they are able to trade directly between themselves. Moreover, they can do so without needing to go through a middleman. This ultimately makes it possible for investors in different locations to trade with each other quickly and easily.

Technology is responsible for the continuous drive of after-hours trading. This is because buyers and sellers don’t necessarily require an exchange in order to trade stocks. There are many who do so through digital-based after-hours trading. It effectively matches up buyers and sellers and aid in the execution of trades.

Now, regarding securities, there is one primary difference between standard day trading and after-hours trading. Stocks and exchange-traded funds regularly trade – though not as much as during the day – after hours. However, more complex financial instruments, like equity option puts and calls, tend to trade a lot less extensively. That is because the general demand for after hours trading in the options market is not that wide-ranging.

Something interesting to note is that after hours trading and early morning trading are frequently put together in the same category. They are both seen as “extended trading sessions,” however, they are not the same thing. One starts before traditional market trading and the other commences following the conclusion of standard trading sessions.

Post-Market & Pre-Market

One can divide after hours trading into two separate parts of the day. The first part is post-market trading hours. A majority of exchanges typically conduct post-market trading between 4:00 PM and 8:00 PM. Additionally, you can participate in the second part, which is pre-market trading. This takes place the morning before the markets open; specifically, before 9:30 AM. The commencement of the pre-market session largely depends on the exchange.

The general appeal

There are a host of reasons as to why trading securities after hours is beneficial. That is to say, it can be beneficial assuming you know exactly what it is you’re doing.

For instance, the convenience factor is highly useful for busy investors. They are able to focus more on securities trading at night. Night-time trading provides investors with the freedom to make wise trading decisions, at least when it comes to the timetable.

In addition, trading after hours gives investors the ability to react to news events that have an impact on stock and fund prices. Moreover, they can generate trades to take advantage of. An alternative action would be to execute a defensive strategy as a response to news in the market.

The mechanics behind it

There are four key mechanics that go into after hours trading: spark, volume, price, and participation.

  • Spark – Traders and investors can use after hours trading should news break after the closure of the stock exchange. There are some cases where the news may provoke an investor’s desire to either buy or sell a stock.
  • Volume – The volume for a stock will probably spike on the original release of the news. However, they mostly thin out as the session moves forward. At around 6 PM, the overall amount of volume generally slows considerably. There is a prominent risk when it comes to trading in illiquid stocks after-hours.
  • Price – Volume will often come at a premium during the after-hours trading sessions. The exact same thing can be said for the price. In the after-hours, it is not uncommon for the spreads to be wide. The spread is essentially the fundamental difference between the bid and the ask prices. Because of fewer shares trading, the spread will end up being much wider than during the conventional trading session.
  • Participation – The liquidity and prices are both enough of an incentive to make after-hours trading risky. To take it a step further, the lack of participants adds to that risk. Oftentimes, certain investors or institutions will ultimately decide not to participate in after-hours trading. This is regardless of the news or the event. So, it is entirely possible for a stock to fall sharply in the after-hours. Furthermore, it will rise as soon as the normal trading session continues the next day at 9:30 AM. This is if many institutional investors possess a different perspective of the price action during the after-hours session.

Cryptocurrency markets

In contrast to trading stocks and commodities, the cryptocurrency market is not tradeable on a regulated exchange. Instead, the market is open 24/7 all across an ever-increasing number of exchanges.

The more successful crypto traders understand that despite the market constantly being open, trades are successful during high global market activity. Beyond the hours of these global markets, trading is prone to being significantly light. This could potentially result in more fragile exchange rates and excessive difficulty in coin sales.

Is this kind of trade even useful for cryptocurrency?

Crypto trade volume frequently plunges and rises as people continue to trade within large global markets. These global markets are accompanied by definite trading hours which are helpful if you are examining a specific type of digital currency against the price predictions.

Moreover, global markets are prone to reacting much differently to the news. For example, business headlines might provoke an abrupt reaction from Americans, thus influencing the price of a specific coin. However, this might not make as many waves in the market of another country like South Korea.

Nowadays in the crypto market, South Korea is one of the market leaders in terms of volume traded. What this means is they have a larger hand than most countries when it comes to moving the prices of certain coins. There was an occurrence of this in December of 2017 with Ripple. During that time, the trading of the coin was roughly 30% more on the South Korean market than the US.

Risks to after hours trading

It is apparent that the development of after ours trading provides investors with the possibility of exceptional gains. Advancements in technology are making digital trading simple, thus after hours trading is becoming more and more common. With that in mind, it would be wise for you to be aware of some of the dangers that come with it. As a matter of fact, the U.S. Security Exchange Commission (SEC) is warning investors to be wary of after-hours securities trading risks.

Risk #1 – Handling of trade order

There is a strong possibility that you may not always have access to the best price on a trade when you’re buying and selling stocks and funds after hours. Because of this, it would be wise for you to get in contact with your broker or trade execution team. From there, you can consult them on the handling of trades after hours. The primary objective is to make sure that your trade is guided to the best price that is available.

Risk #2 – A lack of liquidity

When you are conducting after-hours trading, another risk you may encounter is weak liquidity. This means that there are not enough buyers and sellers at your disposal to get a solid price on a trade. That is often not the case in normal trading hours, which is when the market is full of buyers and sellers. Moreover, there is an abundance of trading partners. Thus, it increases the probability of getting the trade price that you prefer.

Risk #3 – Extensive trade quote spreads

The low number of securities traded and even lower trading demand during after-hours trading can result in larger quote spreads. This is the fundamental difference between the bid and ask price on a stock. Therefore, it leads to lower chances of the execution of your buy or sell order. Furthermore, there are lower odds of you getting the trade price that you anticipated on the transaction. This is especially evident in comparison to regular trading hours.

Risk #4 – Volatility in trade pricing

On the whole, the fewer securities there are to trade after hours, the more dramatic price changes are. To elaborate, price fluctuations that are analogous to securities that go through a trade-in traditional day-time sessions. As a matter of fact, investors that want to trade securities after-hours rely on trading prices being different than during normal trading hours. This is primarily because of considerably high volatility.

Risk #5 – Limit orders only

Brokerage companies only permit the execution of limit orders after hours. According to the SEC, the execution should be at the limit price or better. In the grand scheme of things, this scenario is not that big of a trading risk. However, after-hours investors have to understand something of importance. Should the price drift away from the limit order, then that trade will be subject to removal from the table. As a result, it will not go through a transaction.

There is one other thing to keep in mind. If an after-hours trade stays unexecuted overnight, the investor needs to consult the brokerage firm. The investor needs to see if it will experience an automatic execution during the next trading day. Specifically, when the markets open their doors for business.

Risk #6 – You are going up against traders with experience

In the after-hours market, run-of-the-mill Main Street investors compete against professional traders that possess more skills. As a general rule, buyers and sellers should be careful when they face off against more competent and skillful traders.

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