Prop Training Section 1 Pre Market Trading

Premarket Trading (Rig)

One of our new traders took a rip in RIG premarket. So in his ripper honor I wrote the below. The below offer some suggestions for those who wish to trade premarket profitably. They are based upon our observations of the last ten years day trading professionally.

1) What is my risk? Before every trade we ask that you understand you risk. We ask that you place trades where your reward is 5 and your risk is 1. If you cannot define your risk then you cannot conclude that a trade offers a favorable risk versus reward. Premarket trading is more difficult than when the market is open. Often it looks like you can define your risk, but you really cannot. Your downside may appear to be 10 cents by viewing the inside market but it might actually be 1 point. So ask first what your risk is before placing a premarket trade. And be fairly certain that you truly understand your risk.

2) Less liquidity There is less liquidity premarket than when the market is open. There is less volume. If you are wrong it may be hard to exit your position before a rip.

3) Less size It is a good idea to lower your size when you trade premarket. The swings will be greater so you don’t need as much size to make a chop. But also you don’t want to take a huge rip if you are wrong and just cannot get out of a position. Be careful premarket and trade with less size.

4) Best to watch premarket levels to develop and trade off of those levels a. Understand you downside risk better b. Confirmation from the inside market Generally, I wait to see levels develop in the premarket. I watch for a level that the stock cannot clear, resistance, and a level that the stock cannot trade below, support. And I watch for some volume to be done. If the stock clears an important premarket resistance level, then I may consider getting long. But I understand that in the premarket my downside may be greater than what appears on the inside market. So I look for confirmation from premarket trading. And I search for levels so that I can better understand my downside and limit my risk.

5) Are you prepared? a) Do you know the story? b) Do you know the info from our Stock Data sheet? Look- you have to be prepared to trade a stock premarket. You cannot sit down, look at your filters, see that RIG is up a few points and then start trading it. You must learn its story. You must know the information from our stock data sheet. You must be prepared. Trading premarket can be dangerous. And you cannot do it successfully unless you are properly prepared.

6) If I am wrong where am I going to get out? When trading premarket, I search for a bid that I can hit if the stock trades against me. I actually want to know who I am going to hit if I get long and the stock trades against me. I don’t hope there is someone that I will hit. I spot that bid. And if I am not confident that I can hit that bid, then I do not trade. I play defense first. I must know exactly how I can exit my stock before I get long. If I cannot clearly determine where and how I will exit my stock, then I do not get long.

7) Don’t do this much a. almost exclusively only if I see level

Steve trades more premarket than I do. But that is because he knows more about the markets than I do. He knows the story in more stocks than I do. And for the most part he does not trade stocks premarket unless he follows them closely.

For me, I wait to see levels develop. I look for the same unusual holds on the bid and offer that I do when the market is open. I search for levels to trade off of. If the stock does not trade in my favor quickly, then I exit. I reserve these trades for special circumstances.

8) New Traders For new traders the Premarket should be used almost exclusively to prepare for the trading day. It is by far the most difficult time to trade because of a lack of liquidity. NYSE stocks have virtually no liquidity in the Premarket. Spending time developing your trading ideas between 8-9AM is potentially a much more profitable use of your time than making Premarket trades.

Premarket RIG TRADE One of our new traders bought RIG in the Premarket today (see the chart above). He bought the stock at 79.50 because he though it would go higher. He read their earnings report and felt the stock would trade higher. You know what I think about that. That is very interesting. But your own personal opinion will not make the stock trade higher. You must wait for the inside market to confirm your bias. This new trader did not. And the result was that he took a rip. As I write it is 1:20 EST and this trader got stopped out. He is one of our most improved new traders. He works very hard. He will most likely become an excellent trader. But not making trades like this.