After-hours trading has always been a controversial topic. It takes a certain mindset to succeed in the after-hours markets (which simply means trading after normal stock market hours), and it’s not for everybody.
After-hours trading principles don’t differ much from day-trading principles. However, the after-hours market does have certain idiosyncrasies, and these differences can make it difficult for some traders to handle. Here are some of the reasons why after-hours trading may not be for you.
High Volatility
One of the primary risks of after-hours trading involves the volatility of the market during these times of day. Volatility refers to the tendency of prices to swing up and down erratically. Many people associate volatility with risk, and for good reason.
When prices are volatile, they can move in any direction, seemingly at random. While nothing is truly “random” in economics, when playing the stock market, traders often depend on patterns and trends. During after-hours trading, the trend may not be “your friend,” and even worse, it can fool you.
While it may appear that a trend has formed, due to high volatility, it could reverse on you after you have already taken a position. If volatility is something that concerns you or doesn’t fit with your trading style, after-hours trading may not be for you.
Less Liquidity
Liquidity is essentially a measure of how easily a trade is going to be filled. In a liquid market, there are plenty of shares available at many different price points. When a market is less liquid, there aren’t as many shares for the taking, and if you want to sell your shares, there are fewer people available to take them off your hands. This is exactly the kind of condition that characterizes the after-hours market.
Lack of liquidity is also one of the risks of after-hours options trading, which is sometimes considered a trading environment less susceptible to liquidity requirements.
However, an illiquid market can affect virtually all transactions. During after-hours trading, there aren’t nearly as many traders as there are during business hours. This means fewer people are offering shares for sale and fewer people are out there willing to buy your shares. You may get stuck staring at a price waiting for it to drop to an acceptable level. You may also get caught holding a stock for longer than you’d like.
Wide Spreads
If you’re buying a stock during after-hours trading, the spread is likely going to be wider. This means you will most likely have to pay more for the stock than you would during normal trading hours. The market maker sets the spread in order to make a profit. Due to lower liquidity and more risk during after-hours trading, the spread is bigger during after-hours trading, and this could cost you money.
If any of these conditions doesn’t work with your trading strategy, you may want to reconsider after-hours trading. With investing, you want to only invest in an environment in which you feel comfortable.