Breakout

After Hours Trading: Beginners Beware

Jeff Macke
Breakout

If you follow stocks, earnings season is the pay-off for a quarter's worth of drudgery. When any major, or even minor, company reports earnings, every financial media outlet worth its salt throws up a graph of Wall Street's "reaction" to the news. Suddenly, normally staid stocks are moving in five or even ten percent swings as traders rush to be the first to correctly interpret every headline.

It can be thrilling or horrifying stuff, depending on how you're investing, but that doesn't mean it's suitable for just anyone.

Jon Najarian, co-founder of OptionMonster.com, compares trading pre-market or after-hours to "a feeding frenzy for New Direction tickets." (For those over 16 or not Jon Najarian, New Direction is a popular boy band with an often overwrought fan base.)

"This is where the pros play, it's not where amateurs should be playing."

As an example of the chaos, and danger of trading during non-market hours, Najarian cites traders' response to F5 (FFIV) earnings after the bell on Wednesday. The stock was relatively unchanged going into the news, as is often the case. It was a different story once the numbers were released.

The stock ended the regular session around $124 and dropped in immediate reaction to what seemed a positive report. Smelling blood traders pushed the stock all the way down to the $110 area.

Najarian said those who were bullish on F5 and actually came into the report with a game plan may have been able to take advantage of the move, buying "all they can" at $110.

Instead of doing that, in a bone headed move for the ages, an unidentified trader did the exact opposite. "Somebody saw it in the after-hours, trading down $14, pumped out (sold) 25,000 shares. Two minutes later it was back to unchanged."

From $124 the stock rose another $14 to close the post-market session at $133. A $23 swing on 25,000 shares works out to $575,000. Had the trader gone to the gym rather than trading F5 he'd have been better off by over half a million dollars.

This should be a cautionary tale. Human nature being what it is, the story more likely makes the prospect of visiting this financial wild west even more exciting. Najarian has some tips for those who insist on jumping into the fray.

"Just like all trading you have to have a game plan," he says. Specifically, you need an entry point, an exit plan and the discipline not to change either on the fly. At the very least, these rules of thumb will prevent you from turning a bad trade into a horrible investment.

The bottom line is that anyone who wants to can trade during non-market hours and almost nobody should. The price swings as information trickles across the wires are crazy and fueled by huge money. Neither fundamentals nor technicals matter a whit; it's 100% emotion.

Adrenaline junkies are better off bungee jumping; if that goes wrong at least you don't have to live with the aftermath.

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