Risks of Pre-Market Trading
Now let’s talk about the risks of dealing before the market opens.
1. Limited liquidity: There isn’t as much money moving between buyers and sellers of stocks in the pre-market as there is during regular trading, when there are a lot of traders and investors. Because of this, trading volumes before the market open are usually only a small part of trading volumes during the normal session. There is less liquidity, more instability, and wide bid-ask spreads when there are not many trades.
2. Uncertainity: The prices of stocks that are traded before the market opens may be very different from the prices of those stocks during normal trading hours. Pre-market stock prices may only show prices from one or a few electronic communication networks (ECNs). This is because trade volumes vary a lot between pre-market and regular sessions, which can have an effect on prices. During normal trading hours, prices for stocks come from many exchanges, ECNs, and market makers, which helps find the best prices. The stock quotes shown are a compilation of the best bid and offer from all trading sites.
3. Limit Orders Might not be Carried Out: This is because many brokerages will only take limit orders during extended trading hours to protect clients from prices that go against them without warning. You can only carry out a limit order if the price is at least the limit price. One of the good things about limit orders is that they let the owner know the highest or lowest price at which a stock can be bought or sold. This does not mean that the order will be filled if the market goes away from the limit price.
4. Institutional Players are a Threat: In pre-market trading, there is an uneven playing field for retail traders because many of the other traders are institutional and expert traders with access to better and more up-to-date information and much bigger bankrolls.
Because of these risks, only traders with a lot of experience should trade before the market opens. This is because the probabilities are against regular traders. Traders who have been doing it for a long time know how to read the many subtleties that make trading difficult. For example, they can tell if the pre-market reaction to news is an under-reaction or an over-reaction and know when to make a decision about trading issues like buying or selling stocks, opening a new position, or setting limit prices at certain levels.