How to Day Trade Pre-Market Futures
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 pre-market trading and consider incorporating it into their trading plan.
Opportunities in the Pre-Market
For many futures contracts, trading occurs around the clock. There is increased action when major markets—like New York and London—open and institutions and traders in the same or nearby time zones begin actively trading.
Day traders want volume and movement, and both of these tend to occur as a market open nears. Take the E-mini S&P 500 (ES). The stock market officially opens at 9:30 a.m. Eastern time—and the E-mini tracks the Standard & Poor's 500 Index—but volume will typically start to escalate about an hour before the open. When 9:30 rolls around, volume and volatility increase dramatically and typically continue to do so for the next couple of hours.
By taking positions in the pre-market, traders are trying to get a jump on what will happen at and after the open, when volume and volatility ramp up. And because there are fewer people watching for trade setups, alert day traders can often nab great trades.
One downside of pre-market trading is lower volume. Sometimes a trader may spot a worthwhile opportunity but may not be able to get as big of a position as they would like because volume is lower.
While circumstances will vary according to the strategies being used, a day trader will often be able to find one or two great trading opportunities in the hour prior to the open. So day traders who are active during the open and the first couple of hours of the day may find trading the pre-market worth their time.
Things to Monitor in the Pre-Market
A lot of economic data—and data related to futures contracts—are released in the pre-market. Checking the economic calendar each morning is a good habit to get into.
Get out of all positions at least one minute before major data releases, and don't take any new positions starting five minutes before a data release. That's because data releases can cause price gaps—areas of pricing in which no stocks are changing hands—and they can make controlling risk very difficult. Once the data are released, day traders can begin watching for valid trade setups again.
During the pre-market, day traders need to be especially vigilant about 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 on prices than they would if volume were higher.
Trading Methods 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, traders are generally pessimistic heading into the open. However, once trading begins, futures may rise based on some new trend stimulus. Similarly, if futures are up heading into the open, they may continue to rally after the open or they 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.
Holding Positions Through the Open
Some traders insist you should close out any pre-market positions before the open, while others find no reason to do so. There are a couple of methods you might consider in this regard.
A simple one is to take your trades and place a stop loss and a 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 it through the open, since the instant surge in volatility could easily trigger an excessively close stop loss.
Another method is to exit pre-market trades one minute prior to the open, just like what you ought to do before data releases.
You should consider testing both of those methods and find out what works best for you and your strategies. Record your pre-market profits when you get out before the open and when you hold those trades until the market hits your exit. 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.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.