How Does After Hours Trading Work And Should I Participate?

What if you could trade stocks like you do forex, non-stop all night? Wouldn’t that be awesome?
 
Trading in the middle of the night, trading in the morning, trading after dinner, whenever you want to trade, you just go into the market and make a trade.
 
I guess there wouldn’t be anymore day trading, but that’s not really the point.

The 168-Hour Work Week
 
If we could trade stocks just like forex, 24/7 nearly all week, we’d basically be running up against 168-hour work week and nobody really wants to do that. Heck, we don’t even want to work 40 hours in a week which is the whole point of learning to trade for a living anyway right?

The reality is that institutions and exchanges have limited most of the market's activity to between 9:30am and 4:00pm trading time. That gives us a set of boundaries that traders have to work within. This is where most of the activity happens. But then there is after-hours trading.
 
What Is After-Hours Trading?
 
Well this is the time when you can trade after the typical market close. Traditionally, what used to be limited to just institutions and high net-worth individuals is now open to all of us. Yes that includes you!
 
Did you even know you could trade in after-hours and pre-market trading? Well you can thanks to the electronic communication network, or ECMs. With the advent of the ECMs, it makes it a lot easier for exchanges to route orders and match up buyers and sellers in after-hours trading.
 
Typically after-hours trading is going to work just like the normal market would, only it will have some limitations compared to a traditional trading day. Just like the regular session in after-hours trading buyers and sellers will be matched up according to prices and exchanges will be made. Your account will actually see trades in after hours.
 
You won’t see it all the time, but it has been done, and you can definitely participate. Just check with your broker first to see if there are any extra fees involved.
  How Do The Orders Work In The After-Hours Market?
 
What about your orders? What if your orders don’t get carried over? Do they carry over to the next day? Well not necessarily.
 
Some brokers have what are called “day orders” and those orders are only good for that day, probably including after-hours trading. If there isn’t anybody who is going to match up with you in after-hours trading, then your order gets expired.
 
On the other hand, “good-til-cancelled” orders will stay working and can actually go beyond the same trading day and beyond after hours and into the next day. So if you want orders that are going to go beyond after hours, look towards orders like “good-til-cancelled.”
  4 Risks You Should Be Aware Of Before The Close
 
Here are four risks that you need to be aware of right now if you want to participate in the after-hours market. As a beginner in the stock market or options market, I would highly suggest that you sit on the sidelines and watch, more than participate. It’s always better to understand later then get creamed right now!

1. Liquidity
 
Liquidity is a real issue in after-hours trading. It’s not going to have the same volume and market size that a typical trading day will have, so you’ll have less entries and smaller order sizes.

2. Small Fish
 
Being that you’re an individual trader, you’re going to be going up against mainly large institutions and companies in the after-hours market. They clearly have leverage and the ability to push you out of the market with their pricing.
 
3. Wider Spreads
 
Since there is low liquidity in the after-hours market, the spreads on most of your stocks are going to be very wide with regard to the bid and ask. So make sure you understand where the stock is actually trading, because it can quickly rally away from you or fall away.
 
4. Volatility
 
As I mentioned in the previous three points, since there is low liquidity, a lot of institutional traders, and very wide spreads, you’re naturally going to have an extreme amount of volatility in after-hours markets. Not to mention that you should always check for earnings announcements or company news in the after-hours market. This can absolutely drive stocks higher or lower instantly, after a company has announced something big.  

Meet Me In The Comments Section (After-Hours)
 
So what do you think? Have you ever participated in after-hours trading? Do you participate in it now, or have you ever had a bad trade or a good trade that’s gone your way? What is your opinion of after-hours trading? Add your comments to this post right now and let me know your thoughts.