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How to Trade Pre-Market Futures?

Futures, also known as futures contracts, are a very special investing tool, which is very similar to a bet – you agree to buy (or sell) something at a predetermined price at a very specific moment. In this article, I will show you how to trade these interesting assets in the pre-market hours.
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How to Trade Pre-market Futures?

The Smart Investor content is intended to be used and must be used for informational purposes only. We are not an investment advisor and you should NOT rely on this information to make investment decisions.

To some extent, investing is speculation. It’s risky and unpredictable, yet at the same time profitable. Many investors prefer putting their money in individual stocks without ever considering the existence of futures. That might be a serious mistake.

Pre-Market Trading – The Things You Should Know

Futures, also known as futures contracts, are a very special investing tool, which is very similar to a bet – you agree to buy (or sell) something at a predetermined price at a very specific moment. In this article, I will show you how to trade these interesting assets in the pre-market hours. Let’s get started.

Pre-Market Trading Hours

It’s very important to know where to trade these financial instruments as well as how to do it and how much money it will cost you at the end of the day. Most probably, if you are here, you know that the standard trading hours in the USA are from 9:30 am to 4:00 pm when most exchanges close.

Pre-market, as the name suggests, are the hours of trading before the market opens – usually before 9:30 am. For example, the New York Stock Exchange starts pre-market trading at 8 in the morning till 9:30.

The Nasdaq opens its pre-market trading at 7:00 am. As you can see, this means that premarket investing will involve getting up quite early. Be ready for that if you want to become a pre-market trader.

How Much Does It Cost?

It depends. Different companies, different charges. Some brokers, for example, TD Ameritrade, have a regular commission on trades and you can check this out on their website. Other companies will charge additionally per share. Go to the desired company’s websites and look at their pricing or contact their CS.

ECN Trading

ECN stands for Electronic Communication Network, which is a network that allows traders to trade stock outside of the traditional exchanges and trading hours.

These electronic systems are automated which means that they automatically match buy and sell orders at the preliminary specified price and date. Why are they good? Most participants don’t want to have an intermediary in the process of trading stocks.

ECNs give individual traders as well as companies the opportunity to trade directly without using exchanges. When the first ECN, Instinet, was introduced many companies used to trade stocks. Nowadays, there are many others which help investors trade outside the normal trading hours.

How to Buy And Sell

First of all, to begin trading you need to have an account. You can use the Dow index, to which your futures are linked, to determine whether to buy or sell. Keep in mind that a single point in the index is equivalent to 10$.

So if the index goes up by one point, there is a 10$ increase in the value of your futures. For instance, the Dow Jones index stands at 9,500. What does that mean? It means that your futures contract’s value is 95,000$. Another thing to know is that premarket traders buy or sell on margin. This means that you have to deposit only a small amount of money into your account.

Premarket Trading Vs Traditional Trading

What are the differences between the two types of trading? To begin with, fewer people participate in premarket trading than traditional market trading. This might consequently lead to lower trading volume since the people trading is fewer.

This, on the other hand, can have a serious impact on the prices you desire – you won’t be able to achieve that so easily. In addition, you won’t have full access to all assets because your brokerage might not have access to them during pre-market hours.

All these factors indicate that fewer, more prepared, traders use off hours to place their quotes, so be ready to face some difficulties especially if you are not that experienced at trading.

Premarket Trading Vs Traditional Trading

Which Parameters To Consider in Pre-Market?

Daily traders know that constant access to the latest news and information is absolutely mandatory. If you want to be successful, of course. Pre-market trading entails quite a lot of reading – all the news coming from the day before and during the day. Also, you have to check out the calendar of major economic events beforehand and how they might unravel and affect your trading. Let me give you a few practical tips:

  • If you expect important news, I advise you to leave all your positions before the news release and to avoid trading at least several minutes after the release.
  • Be attentive during the whole period of the pre-market. Expect news to flood since they are abundant before the market opens. In addition, this data might have a more serious effect on your positions since fewer people take part in premarket trading.

Important Economic Indicators

In the previous paragraph, I mentioned the importance of knowing a thing or two about the economy, all the latest economic news as well as some economic factors and indicators. If we have to be honest, successful trading often entails up-to-date knowledge of what’s happening in the market and the global economy.

Usually, major economic news and reports are released an hour prior to opening the market. For example, one of the most important news reports is released by the Bureau of Labor Statistics. Every Friday at 8:30 am EST, they publish data regarding the US employment rate.

What else can possibly have such a serious impact on the pre-market?

Other data released concern the national Gross Domestic Product (GDP) as well as retail sales and the number of weekly jobless claims. Before the news is released, take a careful look at what analysts predict and forecast. If these analyses are inaccurate, the market’s reaction is very strong – either up or down.

Premarket Trading Risks

Risk is an inevitable and inseparable part of trading. According to the Securities and Exchange Commission (SEC), there are several main risks associated with premarket trading.

  • Lack of liquidity – this issue is very serious and I already mentioned it in the article. The volume of stocks is nowhere near as high as during regular trading hours. Therefore, it might be difficult to find a buyer for your futures.
  • Price Volatility – this one is related to the previous risk. If the volume of a stock is limited, then the price will be pretty inconsistent and difficult to track. The fluctuations will be higher than during regular hours and this could eventually lead to serious losses.
  • Difference in prices – the prices of stocks will be unpredictable and incomparable. Sometimes, a stock price can rise during the regular market hours and fall down sharply during outside hours. This lack of correlation and predictability will make it hard for you as a trader to base your daily trading strategy on price movements during the normal hours.
  • Wider spreads – A spread is the difference between a stock’s bid and ask prices. The weaker trading activity during pre-hours might lead to wider spreads between the ask and bid prices. This will eventually make it hard for you to get the price you wanted beforehand.
  • Can’t see all quotes – Being able to examine quotes is very important and yet some companies don’t allow their investors to see all the quotes.
  • Bias toward limit orders – a limit order is an order to sell at a specific price. Thus, you cannot lose a lot but also can’t make a big profit. Many of the ECNs accept only limit orders.
  • Computer Delays – since this is online trading, sometimes the system may delay, change or even cancel your orders. If you have any serious problems, call your broker and have them fixed.

Premarket Trading Risks

Risk Management

Each investor, be it a short seller, pre-market or daily trader, has their own risk strategy. You simply cannot just rush headlong into investing in pre-market futures.

Before you start trading, look at the news coming from several major stock markets – the major ones in the US, The Nikkei, Japan, the DAX in Frankfurt and the Hang Seng in Hong Kong. Follow the performance of different stocks in the other markets because this will determine the direction of the market that day.

Final words

Pre-market trading has its benefits as well as disadvantages. Definitely, the competition is not as fierce as during regular hours. In contrast, less competition means fewer traders; fewer traders means lower volume and more volatile prices.

However, this might also mean huge profits. Generally speaking, whether it’s regular or pre-market trading, the same economic factors play a role. You just have to decide whether this is good for you or not.