How to Day Trade Pre-Market Futures
If You Know How to Take Advantage, the Pre-Market Is a Great Time to Trade
Experienced day traders will often trade futures in the pre-market, and continue to trade after the market officially opens. Trading in the pre-market isn't required, but since there are many great opportunities that arise during that time, day traders may wish to learn about the pre-market and possibly incorporate trading it into their trading plan.
Before you decide if trading the pre-market is right for you, let's look at why to trade it, what to monitor in the pre-market, strategies and holding positions through the open.
Why Trade the Pre-Market
For many futures contracts, trading occurs around the clock. There is just increased action when major markets (like New York and London) are open and institutions and traders are actively trading.
Day traders want volume and movement, and both of these tend to occur as a market open nears. Take the S&P 500 E-mini (ES). The stock market officially opens at 9:30AM EST (and ES tracks stock movement), but volume will typically start to escalate about an hour before the open. When 9:30 rolls around, volume increases dramatically and typically so does the movement for the next couple hours.
By taking positions in the pre-market, traders are trying to get a jump on what will happen up to and after the open when volume and movement ramp up.
Since the pre-market has less volume (compared to after the open), but still usually enough to get in out of positions with ease (this will depend on the contract being traded), alert day traders can often nab great trades as there is less competition and fewer people watching for great trade setups. Therefore, the day trader has a slight advantage in the pre-market in this regard. The downside is volume. Sometimes the trader may be able to grab a trade, but because volume is lower they may not be able to get as big of a position as they would like.
Ultimately though, the pre-market has less volume and competition which creates some random price moves as other traders get in and out of position in low liquidity. These short-term movements can create great trading opportunities for day traders who are watching for advantageous prices to enter and exit trades.
While this will vary by the strategy being used, day traders will often be able to find one or two great trading opportunities in the hour prior to the open. This may not occur every day, but other days more than two opportunities may occur. Therefore, day traders who like trading during the open and the first couple of hours of the day may also wish to include trading the pre-market into their trading plan.
Things to Monitor in the Pre-Market
A lot of economic data, and data related to futures contracts, is released in the pre-market. As always with day trading, at any time of day, day traders should be aware of what data releases are coming out that day. Checking the economic calendar each morning, before trading, is a good habit to get into.
Get out of all positions at least one minute before major data releases, and don't take new positions within five minutes prior to a data release. This is because data releases can cause price gaps, which make controlling risk very difficult. Once the data is released, day traders can begin watching for valid trade setups again.
During the pre-market, day traders need to be especially vigilant with watching for news releases. Not only are there more data releases during the pre-market than during regular trading hours, but because of the lower volume in the pre-market these data releases can have a larger effect than they would if volume was higher.
Bottom line: if you trade in the pre-market be on your toes. Watch for data releases on the economic calendars, and don't hold positions during the release.
Trades Setups Are the Same in the Pre-Market
Your trading methods don't need to change for pre-market trading. However, you trade during regular hours is how you can trade during the pre-market.
While the pre-market can provide some indication of how the day will unfold, it often isn't that reliable. For example, if futures are down heavily in the pre-market, then traders are pessimistic heading into the open. Price may continue lower during the first hour, but it may not. Similarly, if futures are up heading into the open: the price may continue to rally after the open or it may not. In other words, don't put a lot of emphasis on pre-market direction to determine the direction for the rest of the day.
Day traders should stick to trading the short-term trends as they unfold, and not get sidetracked by trying to make grand predictions about how the pre-market will affect the rest of the session.
If the price is trending higher during the pre-market, then trade in alignment with that trend. If the price is trending lower, trade with that trend.
How to trade with trends (and reversals) is covered extensively in 5 Consistent Day Trading Setups. There is no need to re-invent the wheel in the pre-market. Stick to day trading the current trend, isolating and trading solid setups within those trends, and just be aware of the lower volume and increased news events.
Hold Positions From the Pre-Market Through the Open?
A big question is whether to hold a pre-market trade through the open. As discussed, when major markets open (just as the stock market) new liquidity and traders flood in, causing a huge jump in volume and often very quick price moves.
There is no right or wrong answer on what to do, but be consistent with your approach.
There are a few options to consider.
The simplest one is to take your trades and place a stop loss and target. Don't do anything until either the stop loss or target is hit. The price hits your target or your stop loss, just like it would at any other time. That said, if you have an extremely tight stop loss on a position, you may not want to hold through the open, since the instant surge in volatility could easily trigger an excessively close stop loss.
Another option is to take trades as usual, but exit pre-market trades one minute prior to the open, just like what is done with data releases. Traders still get to take advantage of the less competitive trade setups in the pre-market, but don't have to deal with holding a position right at the often volatile open.
Decide what works best for you. How to decide? Test which method works best for you. Record your pre-market trading profits if you get out before the open, and also track your pre-market profits if you hold those trades until the market hits your exit (which may occur after the open). Over the course of several months, you will have a very good indication of whether you should hold pre-market trades through the open with your strategies.
Final Word on Pre-Market Trading in Futures
Day traders will typically find additional trading opportunities if they trade in the pre-market during the hour prior to a major open. The number of trades taken in a day is a key factor in overall profitability.
The same strategies are used to trade in the pre-market as are used during regular trading hours. The advantage of the pre-market is that there is less competition fighting for the good opportunities that arise. The downside is that volume is lighter (which could affect position size) and a lot of economic data is released during the pre-market which can interrupt trades (forced to closed trades before the announcements).
Whether to hold a pre-market trade through the more volatile open is a personal decision. Test whether holding positions, or closing them right before the bell, is more effective.