Afterhours trading: The place where retail is caught. (Post 25/45)
(If you're interested in my previous posts, f o l l o w m e !)
Welcome to post 25.
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In the previous post, we talked about FOMO. The emotional desire to catch a huge big green candle almost always results in the absolute top and you're the exit liquidity.
Let's discuss the danger zone, outside of the normal 9:30 am to 4:00 pm operating hours.
After-hours trading. (And pre-market, too).
Many new traders finally obtain a brokerage account that provides extended hrs trading. They are very excited. They believe that it is a great benefit to them. I can do the trading when everyone is eating dinner or sleeping!
Wrong. You're not being given an advantage. You are entering an all set up game.
So, why is extended hours trading a death trap for retailers?
Liquidation comes to a complete dry up. In the regular session, there are thousands of buyers and sellers keeping the market fluid. But in after-hours? It's a ghost town. As a result, the spread between the bid and ask price becomes excessively large. The ask could be $1.50, but the bid to sell is right at $1.20. As soon as you step open the trade, you lose 20%.
However, it's the classic gotcha moment that ends up in an account getting blown.
A vague penny stock releases a press release at 4:15 PM. The stock is so thin that it takes a few small buy orders to push the stock up 40%. You see that the scanner has gained a huge percentage, and you go in at the market price.
The smart money then intervenes to short or to dump their big bags.
It falls to a discount immediately. Not to mention that there is no liquidity so you can't get out for real. There are zero buyers on the bid. Your stop-loss order? It is totally neglected in after hours trading. You've got a dying stock on your hands and you're sweating and hoping it doesn't gap down even more when it opens at 4:00AM.
There's a warning here: it tends to fall short.
If you are a new penny trader, then disable extended hours trading. Stick to the regular session. Volume is safety. If there is no volume, you're simply playing blind.
Let's meet up with the following post as this!
(As mentioned in the above post, one of the most extreme hazards of after-hours and extended hours trading was broken down and described here.) We talked about the fact that there are huge traps on the market that are just waiting for retail traders to step in, with low liquidity, high bid-ask spreads, and ignoring stop-loss orders, leading to retail traders getting stuck with bags in their hands overnight.