After-hours trading can lead to some crazy fluctuations in a stock’s price. Sometimes we will see a stock fly 50-60% in an hour or two. How does this happen and more importantly how can you profit from these insane swings?
Above is an example of an after-hours trading swing. Zoom Video Communication software plummeted 15% during afterhours one an earnings report.
After-Hours trading affects the stock’s opening price because there is less volume in the stock market during after-hours trading. As such there is a higher chance of a rapid swing either up or down because there are less people trading to correct the change. When the stock market opens the current price in after-market hours will be the new price.
Here at Chronohistoria I teach people how to make money from investing and trading. As such I am going to show you how to trade and profit from these swings so that you can walk away richer in the morning.
Let’s jump right into exactly how after-hours trading affects a stocks opening price.
Why a Stock can Move Fast in After-Hours Trading
Simply put, less people trade in aftermarket hours. Since there is less volume then a large enough order will destroy the ask price’s as it will buy out everyone currently selling the stock. This will result in a massive swing to the upside.
Likewise, if everyone in after-hours started selling shares at market value then there won’t be enough buyers at the current price to prevent the stock from plummeting down.
Here is an example of a stock where in after-hours trading there were more buyers than sellers. Because of this the stock shot up around 50% at 7:30 am on August 31, 2021.
If you invested $10,000 right before this happened then you would have made $5,000 in about 10 minutes!
If you look at the volume (bottom blue bar on chart) you will notice there is significantly less trading activity during the after-hours. As such the above stock was able to jump almost 100% since there were not enough sellers keeping the price from going up.
Once the normal market opened however volume shot up and everyone started selling their shares. This caused the stock to start to decline back down to where it is currently at $9.12.
The reason this stock was able to rally so much was because of after-hours trading. There were less sellers and as such buyers were willing to pay a premium to get in.
This caused the stock to ‘snowball’ out of control and rise in price sharply.
The reason after-hours trading can affect the stock’s opening price is because during after-hours trading there is less volume. This lower volume allows for huge swings either up or down.
How you Can Profit From After Hours Trading
So we know that during after-hours there are less people trading and as such swings are higher, or lower. Therefore the best way we can make money from after-hours trading is to find a stock that is going to explode off less volume.
Here is what I mean.
In the above image we can see that yesterday (Monday, August 30th, 2021) the stock RDHL continued to trade towards its high, even at the end of the day.
As such retail traders during after-hours were willing to pay a premium to obtain this stock price. Since we know that after-hours trading has less volume and results in higher swings we know that if people are going to buy the stock will shoot up.
As a result if done properly we could either sell into this after-hours trading or wait for the market to open. If you waited for the market to open you could have sold into a massive pump and returned 23% over one night!
Or you could have played it safer and sold into the buyers in the after-market hours and only made a measly 13-15% return on investment (ROI). This is still a huge number and if you could even get this return once per week on a trade you will be a millionaire by year’s end.
Risk in Trading After-Hours
Like any trading strategy there is risk associated with trading with it. For after-hours trading the risk is that your projected buyers or sellers won’t show up. You will be left holding the stock and have to wait for the next day to sell since there is just no volume.
Further, if you take a position that is too large then you might have way too many shares to even liquidate if everything goes well. This is why hedge funds and other ‘smart’ money can’t engage in this trading strategy.
At most you should only invest around $10,000-$20,000 into this type of strategy. Any more and you run the risk of not being able to sell your entire investment during after market hours as there just is not enough volume to liquidate everything.
However, you can buy multiple stocks that are trading at end of day highs with the idea of selling into the after market hours. I know some professional traders who just do this strategy and make a pretty good return. The downside is that by managing multiple day trading investments you are going to be extremely busy for the first hour of after market trading.
Engaging in after-hours trading strategies is a great way to make some extra spending cash or to pad your account. The trick to understanding exactly how after-market trading can affect a stock’s opening price is to understand how volume works in after-market hours.
During the aftermarket hours there is less volume and as such the stock’s price can either go up or down quickly as there are less people to ‘stop’ the swing. You can make some pretty good money off understanding this.
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Further, you can check out some of the other articles below.
Here is how long it really takes to learn how to trade options. Most people think they can jump right in however that’s dangerous.
There are 3 things that could happen if nobody buys the company’s stock. Make sure you are aware of these effects so that you can be ready.
Global Macro is far from dead. Here are 5 tricks to help you generate above average returns in your global positions.
Until next time, I wish you the best of luck on your investing journey.