After Hours Trading: What is It and How It Works

After hours trading refers the session that happens just after the close of the regular session. It is part of what is known as extended hours, which also includes premarket trading.

In this article, we will look at what after-hours are and why they should matter to you as a trader.

What are after hours?

There are basically two trading sessions in the financial market. There is the regular session where most of the trading usually happens. It usually starts at around 9:30 am every weekday and ends at 4:00 pm. This is where most traders and investors buy and sell shares.

Trading time

The after-hours trading happens after the regular session ends. It starts immediately after 4 PM and moves ahead until 08:05 pm. The premarket session, on the other hand, starts at 07:00 a.m to 09.25 am every weekday.

Combined, the premarket and after-hours are known as extended hours.

These hours are important in the financial market since for years, market participants have questioned the short trading hours. For one, the stock market is usually opened for about 9 hours per day. This usually excludes many traders, especially those who work during the day, from making money during the session.

After hours vs regular session

The after hours session is relatively different from the regular session. There are several differences from the two.

Volume

First, the total volume in regular hours is usually more than during the after hours. That’s because many large traders and investment banks usually trade during this period. The volume tends to thin during after hours since many of the large players are usually away from the market.

Obviously..the timing

Second, another difference is the time of the day when the markets are opened. After hours open from 04:30 to 08:05 p.m, making the session relatively shorter than the regular session.

The Market Access (Market maker, DMA, ECN)

Third, there is a fundamental difference between how the two sessions work. For example, when you open a trade during the regular session, the broker usually routes it through a market maker. Some of the popular market makers are Virtu Finance and Citadel Securities.

For most brokers, the process of market-maker selection is usually automatic. Others have a direct market access (DMA), meaning that they allow users to select the market maker that offers the best pricing.

However, the after hours trading session usually uses an electronic communication network (ECN) to execute the orders. This means that at times, you will not get the right price for the order.

» See also Direct Market Access vs. Retail Trading «

Assets

Fourth, in the regular session, you can trade all assets that are offered by your broker. This means that you can any asset, including stocks and ETFs. However, many brokers have limits on the types of assets that you can trade during after hours.

For example, you can only trade companies listed on the Nasdaq exchange.

Number of shares

Fifth, there are no limits to the number of shares that you can trade during the regular session. You can buy as much shares of a company as you want. However, in extended hours, you can only buy a maximum of 25,000 shares of a company.

Orders

Finally, you can use both limit and market orders in the market. A market order will be executed immediately while a limit order is conditional on the price hitting the specific preset level. In extended hours, you can only open limit orders.

Why trade after-hours

There are several reasons why many traders focus on after-hours trading. First, many traders who have a regular job usually appreciate the situation of being able to buy and sell shares when the market is closed.

Surf the news

Second, after-hours trading is important because it lets traders take advantage of events that happen after the regular session. For example, many companies are known to release their financial results when the markets close. This gives traders time to digest the news before the next regular session starts.

Therefore, stocks usually react sharply immediately after the earnings comes out. It is not uncommon to see a stock jump or fall by more than 10% in after hours.

» Strategy: Breaking News or Price Action? «

Make more money!

Third, the session helps traders make money for a long period. To many traders, the hours offered in the regular session are not enough. Therefore, having extra hours can help you make more money especially when you are profitable.

Is it safe to buy stock after-hours?

Price divergencies

While many traders love the after hours, there are several risks involved. First, as mentioned above, the trades are executed using the ECN market. This eliminates the need for a market-maker, meaning that you will often not get a good price. In fact, it is common for orders to have a divergence of some points.

Lower liquidity

Second, trading in the after-hours is risky because of the lower liquidity since only a small portion of investors use it. In the regular session, liquidity on all assets is usually high, meaning that you can get a good price.

One type of order

Finally, after hours only accepts limit orders. For new traders, this can be a relatively difficult trading approach.

Summary

The after hours session is an important period in the stock market because it has extended the number of hours that traders have to make money. It has also allowed them to react instantly to latest news and events like earnings and news.

Most brokers in the United States like Robinhood, Schwab, and TD Ameritrade offer the after-hours session that you can take advantage of.

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