Hours Trading Dilemma
by Mike Mc Mahon of TradingAcademy.com
If you want to help potential traders -
you should really spell out the dangers of out of hours
trading. I lost money when a share - Teva Pharmaceuticals
- was suspended when the NASDAQ opened - allowing traders
using brokers with out of hours trading facilities to
take huge positions - the share dropped in excess of 600
points in 1 hour and 20 minutes. - Ann
Thank you for your comments and question. Yes, we really
do wish to help new traders find their way through the
maze of the markets. That is why we teach. Unfortunately,
many people think that they can quickly master an animal
that takes years of study to understand. We try to improve
the learning curve through our various curricula.
Certainly, in class, we talk extensively about the Extended
Trading Hours (your Out of Hours). First, people are eager
to take advantage of a piece of news or information that
they believe is pertinent and substantial - so they rush
to judgment, and try to get a "leg up" on the
market. The Extended Hours are traded primarily by small
firms and individual traders, thus you tend to see small
share sizes which have a lot of impact on a stock's price.
As an example, AMZN is a fairly well known stock. In
extended hours this morning (12/19/03), it was moved .25%
from last night's close by only 76,470 shares while its
ADV (Average Daily Volume) is over 4 million shares -
a stream of 10,256 shares per minute on average. So as
we look at the early trading, we see price being moved
by 100 shares here, 200 shares there and an occasional
2000 share, which is still not a big size. But it did
affect price. However, when the Market Makers (& Pro
Floor Traders) open the stock officially at 9:30 AM EST,
they knock it right back where it should be, so often
the early gains evaporate.
That being said, occasionally the major brokerages can
use the ECN's (Electronic Communication Networks) to their
own ends. By demanding or supplying large share size anonymously
through the ECN's, they can jump on news early. When this
happens, and it appears this is what you asked about TEVA,
then price can move dramatically and stay there due to the
sticking power of the MM's.
So, what have we learned form this? You must understand
that there is only one coin in the market - on one side
is Risk and the other side is Reward. You can not have
more Reward without accepting more Risk. Holding a position
overnight is often very rewarding. You buy it long and
it gaps up nicely the next day on news. Remember this
little saying, "Good News lasts from 1 hour to 1
day, Bad News lasts from 3 hours to 3 days".
The reality of the situation is that nice reward is at
the risk of something happening over night that you cannot
control or foresee - Capturing Osama Bin Laden, or an
airplane wreck, a volcano, hurricane or other extraordinary
item. And these, and a gazillion more, may affect the
price of the stock you are in. So, Unless you can afford
the risk, you cannot afford the reward. That then says,
"Do Not Hold Overnight".
What then of the Extended Trading Hours? They are run
thinly on others' belief systems - things they know, things
they think they know, and things that they have simply
heard without confirmation. This is no way to run a trading
business, this is gambling. So, the rule here is simply
do not trade in the extended hours until they are more
robust and the global community has access to the information
driving the market. We are heading for 24/6 trading at
least. Much like the Forex markets and Futures markets,
the stocks will eventually follow along.
Until there are shares traded with high liquidity during
those hours, do not open positions - simply this and no
more. Again, the allure is the Fast Buck - the answer
is a trading plan that you follow zealously.
Last on the Extended Hours - we teach our people to stay
out, but that does not mean that you cannot use them as
an "escape" or a 911 emergency route. Here you
are, taking your first long home overnight. It has had
good earnings, a steady trend and closed near its high
for the day and on high volume - a fairly high probability
that it will move up. An hour after the market officially
closes, you see a news piece that the CEO and the CFO
of that company were in a plane crash together. If such
a case happens, jump into the Extended hours and close
the position. It won't get better when all the public
comes home from work and see the news on the 6 pm news
channel. It will not heal itself overnight, it will only
get worse as the news spreads and more people start to
sell. So, take your loss early and get out. We, at OTA,
love the saying, "When in Doubt - Get Out!"
In a nutshell:
1.) Beginners or limited accounts should not be in overnight
2.) Entering a trade in any limited liquidity situation
is more a gamble than a trade plan - Extended Hours Trading
is limited liquidity.
3.) Inspect your motives - greed and fear are probably
at the roots of your actions. Are you trading or gambling?
- be honest with yourself.
4.) Use the Extended Trading Hours to escape if necessary.
5.) Know that the trading will become more robust in
the next few years - but that is still years away.
6.) Get a formal education so you clearly understand
all the pitfalls and opportunities the markets offer.
The trader who reads a book or two and tries to trade,
usually ends up as a statistic in a book or two.
I hope this helps. We try to help but cannot answer the
world's questions all at once- we will need a little time
Mike Mc Mahon, Lead Instructor - OTA
Whether you are
a novice or an advanced trader, you can now receive the
most comprehensive and professional learning experience
This article is copyrighted by Online Trading Academy
and is reprinted with permission here. Reprints allowed
for private reading only, for all else, please obtain