Pre-market preparation impacts your performance throughout the trading day. It is an urgent task because financial markets are highly competitive, requiring constant realignment of strategies to short-term conditions. This is especially true in our modern environment wherein securities trade through a 24-hour cycle. Many traders still flip on their screens just before the opening bell hoping to play catch-up. The extra sleep may be beneficial but the competition is getting up early, gathering data and deciding how the overnight session will impact trade flow.
Choose now to join these conscientious folks by shaking off your slumber and following this comprehensive pre-market checklist:
Check Index Futures. Look at the highs and lows printed by the S&P 500, NASDAQ 100 and Russell 2000 Index futures during the overnight session because they will generate support and resistance during U.S. market hours (for additional reading, see Interpreting Support And Resistance Zones).
Review Macro Forces. Read stories that moved world markets overnight and consider how they will impact the U.S. session. These are usually market specific, with a central bank or economic data moving the tape (for related reading, refer to Leading Economic Indicators Predict Market Trends). However, geopolitics and nature generate their own market movers from time to time, so stay informed.
Filter The News Flood. Check for the news on open positions. Upgrades, downgrades and guidance can translate into big losses or windfall profits. Scan financial headlines for other stories that will move the tape as well as for uncovering new opportunities for that session.
See What Other Traders Are Doing. Sort pre-market securities by volume and find out where your competition is risking their capital. Then look at open positions, as well as the flavors of the day, such as stocks reporting earnings or commodities reacting to geopolitical events.
Write Down Key Levels. Internalize key numbers on major instruments and open positions, putting the data right in front of your nose if needed, where you can see it during the regular session.
Identify Pre-Market Levels. Watch where index futures or underlying funds trade in the pre-market, especially after monthly economic data. Those levels may yield breakouts or breakdowns in the regular session.
Find Safe Exits. Exit losing positions in the pre-market, especially when you expect to take a hit after the opening bell. Many traders and investors cannot access real-time quotes until 90 minutes before the U.S. open. You will be amazed at how often third-party exchanges generate favorable exits before that time.
Establish First Bias. Look at the relationship between the last closing prints and the expected opening prints. Identify who will benefit and who is getting trapped. It is time to scramble if you are not on the winning side.
Respect Seasonality. Consider the day of the week, time of the month, month of the quarter and period of the year. Each segment will generate specific price action that favors one market group over another.
Find The Theme. A majority of securities will offer no opportunities during that market day. It is your job to find needles in haystack by following short-term money flow.
Think Irrationally. The red or green you see flashing in the pre-market is less important than the how they alter current expectations. If you cannot figure it out by yourself, find an expert you trust to explain it to you.
Place Deep Limit Orders. Play this game when you are sitting alone in the dark, watching the pre-market. Place deep limit orders on securities you want to own, but not at current prices. Then be amazed at how often you get filled.
Set Your Collar. Decide how aggressive or defensive you want to be in the morning session, based on your pre-market analysis. Re-evaluate at lunchtime or when short-term conditions change significantly.
Avoid The Crowd. Prepare a list of momentum plays and then do nothing while waiting for other traders to get caught on the wrong side of the tape. Then look for cheap entries.
Buy The Dips/Sell The Rips. Securities print big moves in the pre-market because algorithms push them to extreme prices (for related reading refer to Basics of Algorithmic Trading: Concepts and Examples), trying to attract weak-handed capital. Use those rips and dips to get positioned in the opposite direction or take fortuitous exits on open positions.
The Bottom Line
Your pre-market routine sets the stage for the rest of the trading day. Use this comprehensive checklist to get up to speed, ahead of the opening bell.