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Trading After-Hours

Trading after-hours refers to trading outside the traditional trading hours of the major exchanges, such as the Chicago Board of Trade, CME and other exchanges. The traditional or regular trading hours have changed over the years.

Trading outside these regular hours is not a new phenomenon. But it has generally been limited to high net-worth investors and institutional investors, such as mutual funds. The emergence of private trading systems, known as trading over an electronic communications network, or ECNs, has allowed individual investors to participate in after-hours trading. With that said, forex trading hours have always been confusing to many FX futures traders.

While after-hours trading promises greater opportunities and convenience for individual investors and also trade profit opportunities for virtual trading, it also involves major risk. The after-hours trading market can be much more volatile and less liquid. Before considering making an after hours trade, be sure to educate yourself about the extra trading risk involved.

After-Hours Trading - Understanding the Risks

Although trading outside regular window—or "after-hours" trading—has occurred for some time, it used to be limited mostly limited to high net worth investors and institutional investors.

But that changed by the end of the last century. Some smaller exchanges now offer extended their trading hours. And, with the recent sharp rise of trading based on new electronic communications network (ECN's), everyday individual investor can now gain access to the after-hours markets. Before you decide to trade after-hours, you need to educate yourself about differences between regular and extended trading hours, especially the trade risks.

You should consult your stock market or commodity broker and read any disclosure documents on this option. Check your commodities broker web site for available information on trading after-hours. As with trading during regular exchange hours, the trade services offered by brokers during extended hours vary. You should therefore shop around to find the firm that best suits your trading needs.

While after-hours trading presents investing opportunities, there are also the following risks for those who want to participate:

Inability to See or Act Upon Quotes. Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see whether your firm's system will permit you to access other quotes on other ECNs. But remember that just because you can get quotes on another ECN does not necessary mean you will be able to trade based on those quotes. You need to ask your firm if it will route your order for execution to the other ECN. If you are limited to the quotes within one system, you may not be able to complete a trade, even with a willing investor, at a different trading system.

Lack of Liquidity. Liquidity refers to your ability to convert stock into cash. That ability depends on the existence of buyers and sellers and how easy it is to complete a trade. During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades. Some stocks may not trade at all during extended hours.

Larger Quote Spreads. Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.

Price Volatility. For futures with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours. News stories announced after-hours may have greater impacts on commodities prices.

Uncertain Prices. The prices of some futures traded during the after-hours session may not reflect the prices of those markets during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day.

Bias Toward Limit Orders. Many electronic trading systems currently accept only limit orders, where you must enter a price at which you would like your order executed. A limit order ensures you will not pay more than the price you entered or sell for less. If the market moves away from your price, your order will not be executed. Check with your broker to see whether orders not executed during the after-hours trading session will be cancelled or whether they will be automatically entered when regular trading hours begin. Similarly, find out if an order you placed during regular hours will carry over to after-hours trading.

Competition with Professional Traders. Many of the after-hours traders are professionals with large institutions, such as commodity pools, who usually have better access to more information than individual commodity futures traders.

Computer Delays. As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades. For some after-hours trades, your order will be routed from your brokerage firm to an electronic trading system. If a computer problem exists at your firm, this may prevent or delay your order from reaching the system. If you encounter significant delays, you should call your broker to determine the extent of the problem and what you can to get your order futures contract order executed.