Before the opening of the stock market (pre-market): how to trade?

Risks associated with pre-market trading

There are several risks associated with premarket trading, largely due to its differences from trading during regular hours. The Securities and Exchange Commission (SEC) presents a list of risks to consider when trading before opening.1

Here are a few:

Reduced liquidity

The development of trading depends on the availability of enough other traders who are willing to buy and sell the offers offered. During pre-market hours, when fewer traders are present, it is sometimes more difficult to execute trades. Some shares may not be traded at all. These factors can potentially prevent your trades from being executed.

Wide buy-sell spreads

Due to lower trading volume and fewer traders, it may be difficult to match your buy price with a sell price during trading hours. In other words, you may find it difficult to find conditions as favorable as during normal opening hours, which can make it difficult to complete your trades.

Failure to execute limit orders

Many online trading systems only accept limit orders during pre-market hours to protect traders from volatility. Limit orders are executed only at a fixed price, ensuring that you do not buy at a higher price or sell at a lower price than your order. Given volatility, the price of an asset may move away from the limit price. This makes pre-open limit orders unlikely to be executed.

Unpredictable prices and high volatility

Since the number of transactions is limited and the volume is low, pre-market movements in no way anticipate the movement that the price of a stock will follow during normal trading hours. The trend in the price of an asset can reverse or even out at the opening of the markets, which can lead to losses for the trader before the market. A stock’s price volatility can also increase, especially due to overnight news releases.

Competition with professional dealers

While you may get ahead of some of your competitors with pre-open trading, you may also find yourself facing other competition that can be tough to beat. Pre-market trading also attracts institutional investors who may have access to more information than retail traders.

Computer delays

As most pre-market trading takes place online, it is susceptible to computer delays which may affect the execution, cancellation or modification of your trades.

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