Premarket Trading Strategy

  • September 25, 2020

One google search to find a premarket trading strategy yields 6,080,000 results. Yikes. Clearly, one can see that premarket trading is alive and well. But, that doesn't mean you should use your same day trading strategies to trade in the premarket. 

So what is one to do? Should you give the same amount of credence to premarket indicators equally across every stock? Should you even bother trying to trade the premarket?

Luckily in this blog, I will show you what I do in terms of premarket trading to be successful. 

Is There More Than One Premarket Trading Strategy?

  1. Here is more than one premarket trading strategy
  2. Avoid trading low floats
  3. Trade clean charts
  4. Trade high volume stocks
  5. What are premarket highs and lows?
Premarket Trading

Premarket gaps sorted by price high to low - these are stocks I look to trade each morning using Trade Ideas.

1. Premarket Trading Strategy 1: Avoid Low Float Stocks

In case you didn't know, the float is the number of shares available to trade on the open market. 

To calculate, you subtract the closely held shares of insiders, employees, and major shareholders -- from the total shares outstanding.

You can find the number of shares outstanding listed by the heading "Capital Stock." company's balance sheet.

As a matter of fact, avoid low float stocks like the plague if you're new to trading. Here's the thing about low float stocks; they lack supply, and the lower the float, the more potential it has to do something nuts.

This means that any catalyst that causes demand (or lack thereof) will have a more massive effect on the available shares.

Quite frankly, their moves are often so sudden and sharp, they're over before you know it. Typically low float impedes active trading because its difficult to enter or exit positions.

From my experience, not only are they wildly unpredictable, they're virtually impossible to trade. It's somewhat akin to a roller coaster out-of-control.

Now I haven't experienced that yet in life, nor do I hope to, but I would think that's what it would feel like.

Good luck trying to make a consistent profit from them. For these reasons, I don't suggest trading low float stocks as a premarket trading strategy.

Which brings me to the next pressing question: How do you know a stock has a low float? Well, if you can't find the float information, that's probably your first clue. 

Premarket Trading Strategy

2. How Low Is Too Low for Float?

For those of you who like black and white answers, this will disappoint you. There are no hard and fast rules when it comes to defining what "low float" is.

Personally, I like to set the bar at 300,000 or greater to ensure you're trading a liquid stock. All of this is to prevent you from being in a situation where you can't find a buyer or a seller. 

But the float should also be less than 20 million shares traded. Stocks with floats over 20 million typically don't have the big daily price moves you want or need for day trading.

Take, for example, an Apple-sized company with 15 billion shares outstanding. It should come as no surprise that the stock will have a hard time making any substantial moves. My suggestion is to trade options on the high float stocks. 

If you want to trade low floats, make sure to take our day trading course.

3. Premarket Trading Strategy 2: Trade Clean Charts

One thing I've noticed with premarket charts is that they tend to be messy with ugly candlesticks. Likewise, with mess comes the potential to make mistakes.

To avoid this, only trade the chart if it looks like a chart you'd trade during the regular session. If you're 

4. Premarket Trading Strategy 3: The Volume Must Be High

Another crucial point to not overlook is volume. Similarly, any price movement with a correspondingly high volume is considered a stronger, more relevant move than a similar move with weak volume. 

Along the same lines, volume verifies trends and precedes price. As a rule of thumb, a volume surge is mandatory to confirm a breakout.

When looking at implementing a premarket trading strategy like trading premarket breakouts, there's no break out if there's no volume. All it could mean is that you are staring at a false rally. 

Alternatively, if the premarket volume starts to decrease in an upward trend, a reversal is likely coming. 

I hasten to add, high volume in the premarket ensures you get the best price. Therefore, if you fail to take volume in to account as part of your premarket trading strategy, you'll experience slippage.

In the trading world, slippage is the difference between the bid and the ask price. And the problem with slippage is that it makes getting the best price next to impossible. Shockingly, you could have to pay 5% to 15% extra just for the illiquidity in some cases.  

5. How High Should Your Volume Be as Part of Your Premarket Trading Strategy?

There will be times you wake up early and see a massive price surge but only on 15,000 shares. Understandably, this will give you the illusion of a runner.

However, with such low volume, it only takes one large bank move to place a sell order, squashing your morning profits. 

What should you look at?

I suggest you look at how much the stock normally trades on a daily basis. But at a bare minimum, you should look for at least 100k shares traded daily.

Obviously, this isn't enough for a stock like Apple. But, for a stock that trades 500,000 shares daily on average, 100,000 shares is good premarket movement.

How Does the Pre Market Work?

  • Premarket is form 4am to 9:30am when the market opens. Your broker has to allow for premarket trading. Be aware, however, that they may limit order and position size. So think of that when putting together your premarket trading strategy. 

1. Premarket Trading Strategy 4: Identify the Premarket High's and Lows

A key component of a successful premarket trading strategy is the identification of premarket highs and lows. Even though volume is light in the premarket, I promise you, these key price points will act as price magnets in the regular session.

Let me explain why: For starters, traders in a short position will often place their stops right above the premarket high.

Secondly, those who trade breakouts sometimes ignore the days' high and focus on the premarket high as the place to enter their trade.

Your Next Steps

There's no get rich quick solution; if anyone tells you otherwise, run. If you're looking to learn a premarket trading strategy, you've come to the right community.

We have thousands of dollars worth of free courses designed to teach you how to trade stocks the right way. I hope this helped, and enjoy the rest of your week!

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