How I trade pre and post market is a question I’ve been asked many times in my career. The biggest thing I would say is this: preparation is important during all types of trading, but infinitely more crucial if you are going to try to trade after hours.
The best times to trade after hours, obviously, are during earnings season. The first thing you need to have is a completel earnings calendar. As a trader or investor, you should always be aware of when the stocks you own/trade are posting earnings. I always know what stocks have earnings before and after the bell. I have had great success in my career trading earnings before and after the bell because I keep my risk very small by usually not trading the earnings stocks directly. Rather, I trade the stocks in the sector of the ones reporting.
For example, last night F5 Networks Inc. (FFIV) reported, revising revenue guidance down. The stock instantly fell 30 points. In a situation like that, would it be prudent to chase down a trade like that? The simple answer is: NO! So, given that I know FFIV is in the cloud computing sector, I turned to other stocks that often trade with it. I looked at VMWare, Inc. (VMW), Riverbed Technology, Inc. (RVBD) and salesforce.com, inc. (CRM), which also started to get hit after FFIV’s troubling report. I was able to get a nice trade off in VMW at $92.34 (stock closed at 92.86) and made three points on my trade. Did I get lucky with that one? I don’t think so.
It all comes from my preparation as a trader and knowing what stocks have earnings and which sector they trade in. Another time I trade after-hours is when a news play comes out unexpectedly. Yesterday, for example, American Express Company (AXP) reported earnings even though they weren’t supposed to report for another week. Knowing that Visa Inc. (V) and MasterCard Incorporated (MA) trade with AXP, I was able to get a quick short off in V. Again, just knowing the sector can allow to profit in a more low-risk trade.
Now on the flip side, some days there isn’t anything to do pre or post market. When there are no earnings or news, its best to sit and wait for the liquidity of the session. Earlier in my career, I tried to be a hero too many times when nothing is going on. I learned my lesson.
*DISCLOSURE: Short VMW
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