How to Day Trade Pre-Market Futures
Day traders will often trade futures in the pre-market and continue to trade after the market officially opens. You don't have to trade in the pre-market, but many great trades arise during that time. If you're a day trader, you might benefit from learning about pre-market trading. Once you learn how it works, you can think about including it in your trading plan.
Opportunities in the Pre-Market
Many futures contracts trade around the clock. When the major markets like New York and London open, the volume of contracts traded increases. This is because institutions and traders in the same or nearby time zones begin actively trading.
As a day trader, you want trading volume and price movement. Both of these tend to occur as a market open nears. For instance, 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. Trading volume on the E-mini tends to escalate about an hour before the open. When 9:30 rolls around, volume and volatility increase dramatically; typically, it continues to do so for the next couple of hours.
By taking positions in the pre-market, you'd be trying to get a jump on the volume and volatility ramp up right after the market opens. Since fewer people are watching for trade setups right at open, you could often nab great trades if you're alert.
One downside of pre-market trading is the lower trading volume. Sometimes you may spot an opportunity but may not get as large of a position as you would like. If there were more trading volume, your position could be bigger.
While circumstances will vary with the trading strategies being used, you'll often be able to find one or two great trading opportunities in the hour before the open. So if you're active during the open and the first couple of hours of the day, you might find trading the pre-market worth your time.
Things to Watch 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.
Make sure you get out of all positions at least one minute before major data releases. Then, don't take any new positions starting five minutes before a data release. This is because data releases can cause price gaps. Price gaps are areas of pricing in which no stocks are changing hands; they can make controlling risk very hard. Once the data are released, you can begin watching for valid trade setups again.
During the pre-market, you'll need to be very vigilant about watching for news releases. Not only are there more data releases during the pre-market than during regular trading hours, but these data releases can also have a larger effect on prices than they would if the trading volume were higher. Again, this is because of the lower trading volume in the pre-market.
Trading Methods in the Pre-Market
Your trading methods don't need to change for pre-market trading. The way 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, many traders are pessimistic heading into the open. Once trading begins, futures may rise based on some new trend stimulus. Likewise, 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 rely on the pre-market direction to try and determine the direction for the rest of the day. Instead, you should stick to trading the short-term trends as they unfold and not get sidetracked. Trying to make grand predictions about how the pre-market will affect the rest of the session will cost you.
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. Then, 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 before the open, like you do before data releases.
You should consider testing both 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.