How to Trade the After Market Movers

Taking Advantage of Stocks With Big Moves After the Close

Trading big moves in the after hours is the Wild West of stock trading. When volume is low(er) and fewer traders are participating in buying stocks, moves can be extreme and rapid. This means big profit potential but also big risk...and in some situations, it may be very difficult to even determine what that risk is.

Before trading the after market movers, let's first look at what "after hours" is, why stocks move after hours, how to find after hours (big) movers, the pros and cons of trading after hours and some trading strategies.

After Hours Trading Definition

Quiet trading floor before trading begins
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Normal stock market trading hours in the US are between 9:30 AM EST and 4 PM EST. This is when the New York Stock Exchange (NYSE) and NASDAQ exchanges see the most trading activity, as banks and institutions are also open during this time. This is also the period for which opening and closing prices are quoted (on websites and in newspapers). The price at 9:30 AM is the open and the price at 4 PM is the close.

While this time period provides the official open and close for the day, and most of the daily volume occurs between these times, trading also takes place outside these hours.

Pre-market trading is from 4 AM (NASDAQ) and 7 AM (NYSE, but 4 AM for NYSE ARCA securities) EST to 9:30 AM EST. The stock market then trades its official hours. Trading that occurs between 4PM EST and 8PM EST is called after hours or after market trading.

Why Stocks Move After Hours

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After the 4 PM closing bell there are may still be traders who are looking to get into or out of positions, which keeps the action going for an hour or more after the official close. This may occur in stocks that do many millions in volume a day. These high volume stocks may regularly have some after market activity each day. Many stocks, especially ones with lower volume during the official session, may have no trades that take place after hours.

News events, such as earnings, are often released after hours. Earnings can cause big movements in the price and are a key metric that institutions and investors use to determine whether they want to buy or sell a stock.

When earnings are released after hours, traders try to act on the information (hoping to get a jump on most of the traders and investors who won't be trading until the next day). This causes rapid and sizable moves in the share price. This volatility also attracts day traders who look to enter and exit trades for a quick profit.

Ultimately, stocks move after hours for the same reason they move during the normal session — people are buying and selling.

It is important to note that just because people can trade after hours, doesn't mean after hours trading takes place in all stocks. If there is little interest in a stock, it may have no after hours trades (remember, in order for a trade to occur there must be a buyer and seller who are willing to transact at the same price). While earnings in large companies often produce a lot of after hours activity, earnings in a small relatively unknown company may not attract any after hours trades at all.

Finding After Hours (Big) Movers

Finding stocks on the move after hours

For traders interested in jumping into trades after earnings, or day traders who are interested in trading the earning volatility, there are a couple places to look.

Companies publish, in advance, when they will be releasing earnings (and whether it will be after hours). All earnings are listed on Yahoo! Finance.

Traders can also monitor stocks that are moving after hours by checking the MarketWatch After Hours Screener or the NASDAQ After Hours Most Active list.

Most trading and charting platforms also provide some form of pre-market and after hours active list. Check with your broker and/or platform provider to see if this functionality is available to you.

As mentioned above, earnings in well known companies typically offer the best trading opportunities. Price movement and volume are required, so if no one cares about the stock then the volume isn't going to be there (even though a few traders may cause the price to move).

Pros and Cons of Trading After Hours

Trading after market earnings release

There is one major advantage to trading after hours, and that is:

  • Less competition

With fewer active traders, an individual can nab favorable prices that may not be available once more liquidity enters the market again.

Unfortunately, this advantage also has a downside. Less competition means:

  • Less volume
  • Erratic price moves

While it is possible to get some favorable prices and trades after hours, you could also be on the losing end of that deal (you might be the one giving a good price to someone else). With wild price swings and sporadic volume, if you end up on the wrong side of a move it can be devastating. There may be lots of volume in the stock overall, but not necessarily at the price you want to get in or out at.

Another con is that what looks like an easy trade on a chart may actually not be. The attached chart shows an earnings release right after the bell. In the first minute after the release, the price jumps more than $2.75, but only on 10K volume. That means very few people were able to buy this stock (or cover short positions). In the next minute, the price moved up by more than $1.50, and 14K shares changed hands. In the next minute, the price rallied more than $2.15 on 27K. This may seem like decent volume, but with a bunch of traders and institutions all trying to buy very few shares over a span of $6.50, it is tough to grab a piece of a pie.

As the stock price begins to settle down around 4:15 PM (16:15 on chart), more traders are able (or willing) to participate and volume increases. Even though a lot of the movement had already happened by 4:15 PM, there was still ample movement for trades. Between 4:15 PM and 5 PM the stock covered a more than $0.80 range.

The con here is that the big moves are tough to get in on. The pro is that there is usually an opportunity to get some trades in once the initial pandemonium has subsided and there is still volume (or increasing volume).

How to Trade in After Market Hours

Day traidng setup in trending direction

Some traders opt to develop specific strategies for trading after hours or for news events, but typically the after hours strategies employed will be quite similar to those used during regular trading hours.

Traders may opt to use a news-related strategy or a trend following strategy. While the strategy guidelines will be the same for trading after hours and during regular market hours, traders should make extra accommodation for increased spreads, lower volume and bigger price moves when trading after hours. These factors could render stop losses ineffective, which means increased risk of large losses. For this reason, consider reducing your position size (from what you would normally trade during regular market hours) if trading after hours.

Final Word on Trading After Hours

Stock Trader
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In US stocks, after hours trading occurs between 4 PM and 8 PM. While after hours trades can be placed during this time, that doesn't mean all stocks have trades that take place after hours. Most stocks actually don't. After 4 PM most stocks are ghost towns, with no one willing to buy or sell anywhere near the closing price of the day.

Stocks that do many millions of shares a day during the regular session may see some after hours activity after the close.

Earnings can cause big price moves and attract lots of traders (volume) into a stock after hours. But once again, not all stocks will experience enough volume to warrant day trading after hours.

Use similar strategies to what you use intraday, but pay special attention to the possibility of increased spreads, lower volume and larger price moves. Consider reducing your position size to compensate.