As a day trader, you want trading volume and price movement. Both of these tend to occur as a market open nears. For instance, take the E-mini S&P 500 (ES); the stock market officially opens at 9:30 a.m. Eastern time, and the E-mini tracks the Standard & Poor’s 500 Index. Trading volume on the E-mini tends to escalate about an hour before the open. When 9:30 rolls around, volume and volatility increase dramatically; typically, it continues to do so for the next couple of hours. By taking positions in the pre-market, you’d be trying to get a jump on the volume and volatility ramp up right after the market opens. Since fewer people are watching for trade setups right at open, you could often nab great trades if you’re alert. One downside of pre-market trading is the lower trading volume. Sometimes you may spot an opportunity but may not get as large of a position as you would like. If there were more trading volume, your position could be bigger. While circumstances will vary with the trading strategies being used, you’ll often be able to find one or two great trading opportunities in the hour before the open. So if you’re active during the open and the first couple of hours of the day, you might find trading the pre-market worth your time. During the pre-market, you’ll need to be very vigilant about watching for news releases. Not only are there more data releases during the pre-market than during regular trading hours, but these data releases can also have a larger effect on prices than they would if the trading volume were higher. Again, this is because of the lower trading volume in the pre-market. While the pre-market can provide some indication of how the day will unfold, it often isn’t that reliable. For example, if futures are down heavily in the pre-market, many traders are pessimistic heading into the open. Once trading begins, futures may rise based on some new trend stimulus. Likewise, if futures are up heading into the open, they may continue to rally after the open, or they may not. In other words, don’t rely on the pre-market direction to try and determine the direction for the rest of the day. Instead, you should stick to trading the short-term trends as they unfold and not get sidetracked. Trying to make grand predictions about how the pre-market will affect the rest of the session will cost you. A simple one is to take your trades and place a stop loss and a target. Then, don’t do anything until either the stop loss or target is hit. The price hits your target or your stop loss, just like it would at any other time. That said, if you have an extremely tight stop loss on a position, you may not want to hold it through the open since the instant surge in volatility could easily trigger an excessively close stop loss. Another method is to exit pre-market trades one minute before the open, like you do before data releases. You should consider testing both methods and find out what works best for you and your strategies. Record your pre-market profits when you get out before the open and when you hold those trades until the market hits your exit. Over the course of several months, you will have a very good indication of whether you should hold pre-market trades through the open with your strategies.
