What happens when a market opens and closes?
Now that we understand the trading hours of stock markets around the world, it is also important to understand what happens in between these times. In this article, we explore pre-market trading, after hours trading, overnight trading and explore what actually could happen if you do trade after hours.
To start trading the financial markets you will require a trading account with a broker, from here you will be able to trade various market sessions based on its opening and closing times.
What is a trading session?
A trading session refers to the market hours of a particular region. A trading session will run from the when the relevant opens to when it closes. Trading hours will also differentiate based on timezones.
What is pre-market trading?
Pre-market trading refers to activity before the market session begins. Normally pre-market trading can occur between 8:30am-9:30am (EST) of each respective market, traders will tune in to pre-market trading hours as it can determine direction and market sentiment before the regular trading session starts. During this period activity can be scarce and therefore, there isn’t as much volume and liquidity due to this there could also be a large spread. Unless a major news event breaks out that can really impact market sentiment, there isn’t much activity for financial assets during this time.
Normally traders see much of a benefit in trading before pre-market hours, and it can also cause slippage when placing orders to when they are actually executed once the market has opened. However, it is also important to note that when a financial asset is strong during pre-market hours that doesn’t necessarily determine its tone for the rest of the day there is still a chance a reversal can form. Also, pre-market trading can only occur through electronic communication networks (ECNs).
What is after hours trading?
After hours trading happens after the U.S. stock exchanges close for the day. After hours normally occurs around 4pm EST and can run quite late. Again, just like pre-market trading, after hours trading can only take place through ECNs. Normally traders will choose after hours trading if there has been a news break which requires immediate action on the market. This could be for example the release of quarterly earnings. Volume can also be strong just but this can slow by 6pm. Again, just like pre-market trading due to lower liquidity levels the spread can widen compared to normal trading hours.
Why do people choose pre-market trading and after hours trading?
So for traders normal trading sessions will take place between the hours of 9:30am and 4pm EST, Monday to Friday. During market hours there is high liquidity and spreads will be tight due to the volume traded, making it attractive for traders. As explained above there are also times when the market operates outside of the normal trading hours. However, hours outside of normal trading can cause spreads to widen due to low volume. Traders will choose to open positions during pre-market hours and after hours due to various factors. Sudden company announcements such as earnings reports are strategically released so that it doesn’t cause major moves in the stock market, therefore, they might release news like this after normal trading hours has ceased, or before it has commenced. Economic indicators are another set of data which is released before the New York session starts, reactions to the indicators during this period will set the market sentiment for the day.
It is important to remember that after hours and pre-market trading are only available if you have an ECN. To find out more information around normal trading hours and the relevant trading sessions please read this.
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