The process of trading has improved dramatically over the past 20 years, which has leveled the playing field for retail investors. Commissions have come down to miniscule levels over the years, which has allowed daytraders to set up shop. The spread between the bid and the ask has shriveled to a penny or even less on some stock. But all changes are not beneficial to the smaller investor in my opinion. One that has certainly lost more money than it will ever make for the small guy is extended hours trading.
How Can This Be Bad?
In theory, after hours trading is a terrific idea because anybody can trade following or directly preceding an important announcement like an earnings release. Almost all major online brokerage platforms allow for individual investors to trade before and after market hours, whereas before it was only a tool for the big boys. However, I have some advice for you: don’t do it.
There are a few reasons for my caution. First of all, the volume in extended hours is always less than the normal session, which makes violent price swings the norm rather than the exception. This is especially true after an earnings report. Investors buy and sell based on knee jerk reactions to headlines rather than rationally analyze all available data.
There are thousands of instances where investors have traded on first glance and sold in a panic, only to see the stock turn around dramatically in the next day’s session after millions of people have had a chance to pore over the data. I wrote an article about liquidity and the dangers of buying and selling illiquid stocks. This is especially true for the extended hours session.
One good piece of news is that one cannot place market orders during after hours trading; only limit orders are permitted. This removes some of the danger, but not all of it. Institutions can still push you around like a bully in the schoolyard and the price volatility is still frantic. There is no reason why your order can’t wait until the normal trading session. Any strategy that requires trading during extended hours is one that will likely not stand the test of time anyways.
I am sure there are some instances where you have gotten a great entry price in the after hours session, but there are many times more stories of people getting wiped out or terrible executions in those sessions. Let the big boys fight among themselves when the market is closed.
Stick Between 9:30 and 4:00 is an article from: 
