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Identifying Pre-Market Opportunities

PREFACE
Opportunities in the market are plentiful if you know where to look. The biggest traders in the market need lots of size and lots of liquidity to move the needle of their investments. This opens some opportunities to smaller players who can trade more nimbly to take advantage of market inefficiencies in trading outside of market hours. Even if you don’t have an interest or need to trade the premarket, there are plenty of advantages to starting your analysis before 9:30 am EST, including identifying valuable pre-market support and resistance levels.

Let’s dive in.

WHAT DOES IT MEAN TO TRADE THE PREMARKET?
Pre-market trading is any trading that occurs before the opening of the regular market trading session, which is 9:30 am EST. However, you can trade using ECNs as early as 4 am. Your brokerage firms may limit the hours for trading pre-open, change your pricing structure, or apply an expensive surcharge, so ask before you trade.


LIMITS OVER MARKETS

Pre-market trading, while potentially lucrative, is associated with volatile price action and wide spreads. Using limit orders will guarantee that you get the price you want (or better), while not risking a fill at an unreasonable price. They are ideal for premarket trading. Except in cases of very liquid instruments or during earnings or economic news that would drastically increase the volume, you would not use market orders during non-market hours.

Depending on the software, the orders you place in the pre-market would need to be classified as either Day + Orders (Trading Day plus Extended Hours) or EXT orders (Extended Hours). Ask your technology provider for details.


LESS VOLUME, LESS LIQUIDITY
Trading the pre-market often offers far less liquidity than in the broad market as the majority of traders are not actively trading the stock. It’s extremely difficult for traders to anticipate the price action on their stock once the market opens. So it is extremely tough to buy or sell a security when only .25% of the total trading volume is executed in the pre-market for the stock. Market orders don’t work. That means you’ll need to change your order type. If you use the think-or-swim platform, the type is EXT, which stands for extended hours. That said, there are a lot of orders that get executed through dark pools in the pre-market. You’ll also see more hidden orders in the pre-market. However, if you stick to stocks that are catalyst driven, you should be fine. Don’t trade stocks that don’t have much volume, getting out could prove to be a difficult task.


BROKEN TRADES

You wake up early to watch the pre-market because your favorite stock may be rallying due to overnight economic news, and Europe and Asia are trading higher. You identify the right prices that you’d like to bid, and you are ready to execute your plan. Instead of placing a limit order to buy, you place a market order. Your 1000 shares get printed 5 points above the last print. What do you do?

As we said, pre-market trading offers many opportunities for additional profit and peril. Limit orders are advised. However, human beings are flawed, and we make mistakes. The exchanges understand this and would define a trade like this as a potential Clearly Erroneous Transaction. A Clearly Erroneous Execution (“CEE”) is an execution with an obvious error in any term, such as price, number of shares, or other unit of trading, or identification of the security. As of January 2020, the guidelines for a CEE on ARCA are as follows:

Price of the Equity The Percentage Difference Between the Executed Price and the Last Sale

Between $0.00 and $25.00 20%

Between $25.01 and $50.00 10%

Greater than $50.00 6%

Therefore, to use the previous example, if the stock you were trading was $20 and you were filled at $25 (a 25% difference) you would be eligible for a trade break as your trade will be defined as a CEE. If your stock was $100 and you were filled at $105 (a 5% difference), it would not be a CEE, and you would be responsible for the trade. Each trading exchange has different rules and policies regarding these situations. Reach out to your brokerage firm for details if you think this applies to one of your trades.

PRE-MARKET ANALYSIS
Usually, listed companies release their press before and after market closes to allow the public to digest the information. However, company press releases are not the only information that will get distributed in the morning. Many research firms issue recommendations and guidance, upgrades/downgrades, and reports that act as market catalysts, and can cause significant price action. In watching the pre-market trading, you’ll have a chance to digest al the news and potential catalysts and maybe even take profits from your trades the day before.

Keep an eye out for:

  • Headline news events that could affect your universe of stocks in the pre-market
  • The Earning Calendar for your universe of stocks and companies whose announcements can affect your universe
  • Index Futures and eMinis such as the S&P, Nasdaq and Russell to identify important technical levels
  • European and Asian indexes
  • Macroeconomic News like central bank movement, political climate, inventory data for various commodities and GDP and GNP releases

Trader sentiment on various social networks like Facebook, Twitter, LinkedIn, Stocktwits, and of course, Score Priority Club

WHY TRADE THE PREMARKET

This one is simple. Unless there is news or significant price action, there is no reason to trade in an illiquid environment with unpredictable pricing. Identify if you have an edge before the market opens and exploit it if you do. Otherwise, the risk and reward of trading pre-market don’t really make sense.

Good luck and be careful in the pre-market.

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