Pre market trading hours are an oft over-looked part of the trading day. For day traders they are an opportunity to make money. Yet the opportunities are also counter-balanced by risks you need to know about!
What are pre market trading hours
Why is there an opportunity to make money
Which big risk do you need to know about
Many of you will know about market trading hours, with the traditional and iconic opening bell starting the trading of shares and other assets.
Yet there are also trades which are done before the main market opens. There are stringent regulations as to the reporting of these pre market trading hours trades. In the context of this article, we do not intend to bore you with them!
On the other hand, for those of you trading spread bets or CFDs, pre market trading hours are something you have to follow closely due to the volatility involved.
Pre market trading hours are typified by low trading volume. This means that any news has a tendency to create large moves. These moves can be very violent. Furthermore these moves can be driven by rumours and fiction, rarely facts.
As a result it is difficult to be on the right side of trade. Moves can be as large as 1/2% only for these moves to disappear when the market opens. Some experienced traders will avoid trading in this period as a result.
For those who seek volatility to create trading opportunities, the enhanced volatility can be very profitable. This is because the large moves are magnified profit-wise by the leverage that spread bets and CFDs include.
Yet you will have to admit that your ability to get it right will be reduced as there is little consistency to pre market trading hours. As a result, you should place your trades with a margin of safety and using a risk model.
In fact your trades should be placed with a risk-adjusted return in mind. Ideally you would trade using the risk reward ratio. This way your risk model will stop you from blowing up your account, and the ratio will ensure you place trades which are beneficial to you.
Although open market trading hours vary from country to country, they are usually concentrated around the 0800-1630 period. As a result of being open for all, you will see a clearer picture of what is going on, because any large move will be directly traceable to a news report, such as monetary policy.
Indeed, many traders place their trades around 1000 when that days “trend” becomes clearer. The opening bell and closing bell are usually incredibly volatile, and rarely worth the risk.
One large risk you face is gaping. This is where an asset price jumps or drops significantly without pausing. As a result it can jump through various stop losses you have and lead to substantial losses for you.
An example of this is seen in the below chart where as a result of an OPEC oil production cut, Brent crude jumped 5%. The volatility in itself is not surprising, but it happened late in the evening on a Sunday night. Not exactly a time where many traders are in front of their screens.
In truth it is virtually impossible to protect yourself fully. This is something you will have to accept as a trader. There is a residue risk which will always exist. One basic method is the use of stop losses. These are a request to sell your position if a particular price is reached.
Unfortunately if markets react with significant volatility, the amount of people likely to be trading at the same time as you means your stop loss may not work at the price you wanted.
Brokers have latched on to this by offering guaranteed stops. In principle this is very nice (especially for the brokers who charge more for the service) but in truth, they are not guaranteed. Your stop loss just gets traded before many others, but again in times of extreme volatility you will still lose more than you expected.
Furthermore, you could get ‘stopped out’. This is where the asset price reaches the stop loss price and is triggered, but then falls right back down. In effect you waisted your position. It is often claimed by many frustrated traders that brokers do this on purpose, as it forces you to place another trade. (More profit for them). It is not clear if this is the case, but it would be mindful to be aware of it.
Pre market trading hours are an integral part of trading for yourself. The moves are large and can be profitable but also risky. If you do choose to trade these quieter hours, ensure your position size is smaller than normal.
This is two-fold: firstly the lower liquidity means you do not want to be the one to move the market (usually against you!) and secondly because if there is a negative move, you will not suffer the consequences!