Extended Hours Trading

The operating hours of the US stock market fall late at night according to Indian Standard Time (IST), making it challenging for Indian investors to invest in the US stock market during market hours.

The regular market hours of the US stock market for Indian investors are from 7:00 PM to 1:30 AM IST, which corresponds to 9:30 AM to 4:00 PM Eastern Time (ET) on trading days.

To overcome this time zone difference, Indian investors can benefit from extended hours trading in the US stock market. While extended trading hours are not exclusive to Indian investors, this article explains what US stock market extended hours are and how they can be beneficial to them.

What is Extended Hours Trading?

As the name suggests, extended hours trading refers to trading that occurs outside the standard market hours. It includes additional trading sessions both before (pre-market) and after (post-market) the regular market hours. These extended trading hours enable investors to respond to news or developments that occur outside regular market hours by placing timely orders.

How Extended Hours Trading Works

Extended hours trading, which includes both pre-market and post-market sessions, enables investors to trade outside of standard trading hours. The objective is to provide additional flexibility, allowing investors to react to market events and adjust their positions accordingly.

When Do Extended Hours Trading Sessions Occur?

Extended trading hours are classified into two categories: Pre-market hours, and Post-market hours. As the names suggest, pre-market hours occur before, and post-market hours take place after, the regular trading hours respectively. Here’s a detailed breakdown of the time frames for extended hours trading and regular trading hours in both the US time zone (Eastern Time – ET) as well as the Indian time zone (Indian Standard Time – IST).

• Pre-market hours in the US stock market for Indian investors run between 1:30 PM to 7:00 PM IST (Indian Standard Time), which corresponds to 4:00 AM to 9:30 AM ET (Eastern Time).
• During regular trading hours, the US stock market for Indian investors operates from 7:00 PM – 1:30 AM  Indian Standard Time (IST), which translates to 9:30 AM to 4:00 PM Eastern Time (ET).
• And the Post-market hours in the US stock market for Indian investors run from 1:30 AM to 5:30 AM IST (Indian Standard Time), which corresponds to 4:00 PM to 8:00 PM ET (Eastern Time).

Benefits and Drawbacks of Extended-Hours Trading

While trading outside of regular hours offers several benefits, it also comes with certain drawbacks. Hence, it is essential to understand the advantages and risks involved with US stock after hours trading. Here are some benefits and drawbacks of trading in the non-standard market hours in the US stock market:

Pros of Extended Hours Stock Trading:

• Opportunities to investors : Extended hours trading allows investors to respond promptly to new developments in financial markets, even outside regular trading hours.
• Higher Convenience : Extended hours trading offers investors more flexibility to place orders outside regular trading hours.
• Price Discovery Potential : Extended trading hours may support smoother price discovery and allow investors to interpret market trends, though the process may be slower due to lower participation.
• Lesser Competition : Compared to the regular market hours, fewer investors participate in the extended hours, which essentially means that the ones participating have an opportunity to make use of the reduced competition to their advantage.

Cons of Extended Hours Stock Trading:

• High Price Volatility : High price volatility is one of the biggest risks of extended hours trading. The low liquidity can contribute to higher price swings and an increased volatility, which can contribute to losses.
• Low Liquidity : Due to fewer participants during extended sessions, order matching is less efficient, leading to low liquidity
• Increased Risk : The overall risk exposure with trading in the extended hours is higher due to characteristics such as high volatility, low liquidity.

Other key differences of Extended and Regular Trading Hours are as follows:

• Liquidity : Liquidity in the market is lower during the extended hours trading sessions as compared to the standard trading hours.
• Risk : The risk exposure is comparatively higher in the extended hours trading citing various reasons such as low liquidity, and high volatility.
• Opportunities : Extended trading hours may offer unique trading opportunities for the investors that may not be available during the standard trading hours. These opportunities can help with an efficient price discovery.

Tips to Succeed in Extended-Hours Trading

Trading during the extended trading hours presents opportunities however, it may also expose the investors to some risks. Here are some tips to succeed in the extended hours trading:

• Understand Market Sentiment : Analyzing the market helps avoid poor trade decisions in the extended hours session. This helps in avoiding positions which may amplify the losses once the market opens for regular trading.
• Account for low liquidity in the market : The market has low liquidity during the extended trading hours. Investors should take this into account and adjust their positions accordingly.
• Never over-react to news : Some news or market development may seem big, but can have a very muted effect in the market. It is recommended to never over-react to the news and over leverage your position on the basis of news alone.
• Risk exposure should not exceed your overall portfolio risk : Trade positions during extended hours should align with your overall portfolio risk tolerance.

Popular Strategies for US stocks Extended Hours Trading

• Momentum trading : Momentum trading involves capitalizing on a stock’s ongoing price movement to generate returns. For example, let’s suppose a particular stock has gone up substantially in a short timeframe and continues to do so, then the investors may take a long position to make use of the price momentum, and vice versa.
• News-driven trading: News-driven trading is commonly used during extended hours to capitalize on market-moving developments. In this strategy, the investor takes a long or short position based on any news or development in the market. The aim is to take a position before the market is able to react to the news.
• Risk Management Techniques: During extended hours, traders often use strategies such as stop-loss orders and portfolio diversification to mitigate risks.

Common Mistakes to Avoid in Extended-Hours Trading

Extended hours trading for active traders can be beneficial but may sometimes expose them to risks due to certain avoidable mistakes. Here are some mistakes that a trader should avoid especially during the extended hours trading.

• Relying exclusively on News-Based Trading: Relying exclusively on news for trading decisions during extended hours trading may help you make short term profits as it can enable you to take position in a security before the market participants have had the time to react to it, but it may not yield consistent results from a long term investing perspective. Hence, the investors should take trading decisions backed by both news as well as their research..
• Not checking liquidity : Before taking a trade, it is prudent to check the liquidity of the stock in the market especially during extended hours when the overall liquidity is low. Failing to assess liquidity may lead to partial or unfilled orders.

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