One of the most effective tools you can use to control investment and trading risks is stop loss. Typically utilized during day trading, it helps traders minimize losses while locking in profits. But is it possible to use stop loss before markets open or after trading closes?
Stop loss does not work in after market and pre-market sessions. Stop loss orders set for day trading typically expire at the end of the market session if they don’t get triggered during the day. Those placed during extended hours get queued for execution on the next day’s open market.
The rest of this article will expound more on when and how to use stop loss and provide more detailed information on how extended-hours trading works.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Does Stop Loss Work During Extended Market Sessions?
Stop loss orders usually work during regular market sessions. A stop loss is an order that allows you to exit your trade upon reaching a certain predetermined price. This helps you avoid losses when the market goes against you.
For instance, if you purchase a security at $30 and set a stop-loss order at $20, the stop-loss will trigger when the price gets to $20. This helps you avoid further loss. But if the price doesn’t go down $20, the stop-loss won’t execute.
The orders typically run between 9:30 a.m. – 4:00 p.m. ET. As such, stop loss orders don’t take effect or execute during after market and pre-market sessions. The same case applies during stock halts, weekends, or market holidays when trading comes to a halt.
How To Stop Loss After Hours?
If you place stop loss orders during extended hours, they usually get queued for execution on the following day. Trailing stop orders also follow the same principle.
That said, you can choose to carry over your stop orders to future market sessions. Such stop losses are referred to as Good-till-canceled (GTC) stop orders and can remain effective for up to 60 days.
When determining the ideal point to place your stop-loss, you first need to consider how much value you’re willing to lose and then place your stop loss accordingly. The general rule of thumb is that you should set your stop-loss at a distance such that it’s not triggered too early.
Yet, this shouldn’t be so far that you risk losing a substantial amount of capital. This means that your trading strategy should allow you to enter and exit the market strategically.
When buying, a simple way to place your stop-loss is to put it below a swing low (when a price falls, then bounces). The swing low finds support at a lower price level, allowing you to trade following the trend. On the other hand, the stop-loss order falls slightly above the swing high when you’re selling. The swing high finds resistance at a higher price level as the stock price rises and then dips.
You can also use other methods to determine where to place your stop loss, such as technical indicators. Ultimately, you should try out various methods until you settle on one that works for you.
What Are the Aftermarket and Pre-Market Trading Sessions?
Pre-market and after market sessions take place outside formal market trading sessions begin. The early sessions run anywhere between 8:00 and 9:30 a.m. while aftermarket hours are between 4.00 and 8.00 p.m. Different brokers offer different timings; hence some pre-market sessions could start as early as 4.00 a.m.
During the extended trading sessions, the electronic communication networks (ECNs) replace the regular stock exchange. This electronic market matches potential buyers and sellers.
Advantages of Aftermarket and Pre-Market Sessions
After market and pre-market trading sessions enable you to continue trading after the regular market has closed. You can take advantage of these extra trading hours to:
- Participate in trading. Extended trading hours offer you the opportunity and convenience of trading if you’re unable to do so during regular trading hours. This could be due to work or a busy schedule.
- Check where the market and specific securities might be heading before regular trading begins.
- Take advantage of special events like earnings releases that could cause a stock price to rise or fall. Most companies make their earnings announcements either after the market closes or just before the market opens. If you want to place your position after an earnings announcement but wait to do so once the market opens, this might turn out to be too late.
- Get ahead of reactions to market news. This gives you the opportunity to react quickly to fresh information that might affect your securities or the general market, e.g., political unrest.
- Capture potential opportunities in foreign markets. Such markets have market activity outside traditional market hours.
- Take advantage of attractive stock prices. Though there’s a high risk of volatility during extended trading hours, there’s also the chance of finding securities with attractive prices.
Disadvantages of Aftermarket and Pre-Market Sessions
Trading restrictions during extended sessions occur because trading activity during these sessions tends to be riskier than during standard hours. Besides, since fewer traders actively participate in trading, liquidity levels are often lower, leading to increased price volatility. In addition:
- Lower liquidity levels make it more challenging for investors to buy and sell securities, pay or receive competitive prices for their securities. As such, your order may fail to get implemented in full, or it might fail altogether.
- Price adjustments might not happen as quickly as they do during the standard trading sessions.
- Lower trading volumes could result in wider spreads between the bid and ask prices, making it more difficult for your order to get fulfilled at an appealing price.
- Company announcements may take place at this time, and this plus low liquidity and high volatility may lead to an unsustainable effect on your securities. Thus, you could receive an unfavorable price if offering a security for sale.
- Individual traders face tough competition from institutional investors who have better access to resources such as data.
What Type of Orders Are Acceptable During Extended Hours?
Once approved, the type of orders allowed during extended market sessions include the following:
Market Orders
Market orders placed during a standard trading session remain pending till the market closes. Those placed during extended hours remain valid during these hours while market orders placed after all trading sessions close get queued to be fulfilled once regular markets open, and not during the extended sessions.
These buy or sell orders are usually executed at the prevailing market rates, unless the trader specifies the order price.
Limit Orders
These orders specify the price (target limit price) and quantity (lot size) of stocks to be bought or sold. Limit orders only close your trade either at the stop loss price or an ideal price. They get executed as soon as matching orders are available. They’re valid for both regular and extended trading sessions.
Good-til-Canceled (GTC) Orders
GTC orders placed during the pre-market, day trading, or after-hour sessions remain in force through all the sessions until their execution or cancellation. However, Good for Day (GFD) orders placed during all trading sessions automatically expire once the extended-hours session is over. Any GFD orders placed after this session get queued for the next regular trading session.
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Conclusion
Stop orders are an invaluable tool for stock traders since they help you become a disciplined trader rather than one led by emotions. However, you still need to understand how the market works and what factors can affect the execution of your stop loss order.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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