The SEC’s approval of the 24X National Exchange has accelerated the shift toward 24-hour securities trading in the U.S. This shift seems inevitable—both the NASDAQ and the New York Stock Exchange (NYSE) have announced plans to extend trading hours as well.
Twenty-four-hour trading allows investors to engage in trades of stocks and other assets around the clock, rather than on the traditional stock exchange schedule that typically aligns with a workday in the Eastern time zone. This type of trading is increasingly popular among investors who have experienced substantially extended trading hours in foreign exchange, cryptocurrencies, and other areas.
Tip
To learn more about investing anytime, anywhere, see the rest of the 13-article series: 24/7 Trading Guide.
Below, we explore what new traders are likely to get wrong about markets that operate 24/7. We will debunk myths around these types of markets and offer tips, strategies, and tools to get started in 24-hour trading.
Key Takeaways
- U.S. stock exchanges are moving toward 24-hour (or nearly 24-hour) trading cycles.
- Investors will need to adapt to a new pace of the trading day, news cycles surrounding companies, and more.
- While 24-hour markets pose some risks to investors, they may also present opportunities for those approaching this new ecosystem thoughtfully.
Understanding 24/7 Markets
24X will aim to provide 23-hour-per-day trading from Sunday evening through Friday evening, Eastern time. This represents a more expansive trading schedule compared with the Nasdaq and the NYSE, both of which have traditionally been limited to a core session of 9:30 a.m. to 4:00 p.m. Eastern. In response, both of these long-established exchanges have announced plans to broaden trading hours, and some brokerages have also moved to facilitate round-the-clock trading as well.
Important
Keep in mind that 24-hour trading does not necessarily mean that a stock will trade in the same way at all hours of the day. Currently, after-hours trading relies upon limit orders and may suffer from dramatic price swings due to thin volume and wider spreads between buy and sell prices.
Myths and Truths About 24/7 Markets
Most investors—and even the most experienced investors—have not experienced 24-hour trading, and there is a good deal of speculation about what the advent of 24/7 markets might do to trading. Below, we take a closer look at some of the myths and truths of a continuous (or near-continuous) trading cycle.
Lower Liquidity
There is an idea among investors that a 24-hour trading schedule will invite periods of lower liquidity. Although the launch of 24X and extended trading on the NYSE and the Nasdaq will mean that investors can trade stocks essentially around the clock on many days, that doesn’t necessarily mean that the volume of trades will be consistent. After all, even the most dedicated traders need to sleep at some point.
There is likely truth to the idea that an expanded schedule could yield lower liquidity. One point of evidence is current extended-hours trading patterns—typically, after-hours trading sees lower interest and price competition, which means that trading costs can become higher and execution more difficult.
Higher Volatility
By a similar token, some investors expect that 24-hour trading will bring about periods of higher volatility. On one hand, lower levels of interest might also create higher price volatility during overnight trading in this schedule. Skeptics might also point to the impact of after-hours breaking news and dramatic changes in price that have taken place in individual stocks before the opening bell in the next trading session.
On the other hand, though, one of the reasons for discrepancies in volatility levels between current normal trading hours and after-hours periods is that the latter lack certain exchange-wide protection measures that limit certain cases of volatility. For example, the NYSE has a number of “circuit breakers” designed to halt or even close trading in these situations.
Many of these systems are currently not available during extended-hours trading; if exchanges modify their structures along with expanded trading hours to make these systems function throughout the 24-hour trading cycle, it may have a mitigating effect on volatility.
Increased Risks
It’s difficult to say whether 24-hour trading may mean an increased overall risk level for investors. Some of the risks associated with extended-hours trading—the fact that markets aren’t currently linked at this time, that extended-hours prices do not impact closing or opening prices, and so on—may well be resolved as the broader market adapts to a new trading schedule. For this reason, it’s important that investors monitor system-wide changes to trading policies as round-the-clock trading becomes officially implemented, as this will help them to assess how the general level of risk is changing as well.
Impact on Day Trading
One of the benefits many investors see in extended-hours trading is the ability to respond in real time to news that breaks outside of the regular trading day. It’s not uncommon for trading activity made after hours to have a significant impact in the early hours of the next trading session.
It remains to be seen whether the same might be true in a 24-hour trading scenario. On one hand, markets would not need to “catch up” when the opening bell rings. On the other hand, and as mentioned above, many traders may not pay attention to activity taking place in the middle of the night and may still adapt to changing conditions the next day.
Strategies and Tips for 24-Hour Trading
Before engaging in 24-hour trading, investors should be sure to have a solid understanding of market mechanics, the use of limit orders, and set appropriate limits. Consider the following:
Technical Analysis
As in traditional trading, technical analysis can be an important measure of suitable entry and exit points for an investment position. Investors should beware, however, that thinner trading volumes at certain hours of a 24-hour cycle may reduce the effectiveness of these tools.
Keep in mind also that technical indicators can suggest false signals during times of particular market volatility. Still, combined with automated trading for investors interested in completing trades overnight or while not actively monitoring markets, technical analysis can be an essential tool in 24-hour trading.
Fundamental Analysis
The principles of fundamental analysis need not necessarily change in a 24-hour trading scenario. What may differ, however, is the frequency with which investors may need to monitor these factors and the need to be adaptable at all times to changing conditions.
Risk Management
Extended-hours trading has often been associated with higher levels of risk than the core trading session, due in large part to smaller numbers of market participants, higher volatility, lower liquidity, and a disconnect from the markets. These risks may continue to play a role in 24-hour trading as well, and it will be up to individual investors to continually assess both market conditions and their own risk tolerance levels.
Automated Trading and Bots
Trading bots are increasingly common in cryptocurrencies and are likely to gain popularity in 24-hour securities trading as well. These tools can be useful for dollar-cost averaging, arbitrage, executing on trends, and more. However, due to the unpredictability of price movements and volumes in a 24-hour setting, investors should be cautious before employing automated trading methods.
Diversification and Portfolio Management
One of the essential elements of diversification and portfolio management in a 24-hour trading space is not overtrading. With that many more hours available for trades, investors may be tempted to execute many additional trades each day.
Note
Transaction costs can erode an investment, and even though individual costs may be small, they do add up over time.
Platforms and Tools for 24/7 Trading
Most modern trading platforms provide a host of tools that can be useful for traders adapting to a 24/7 (or a 24/5) cycle. From automated order execution to chart analysis and API integrations, online trading platforms commonly offer many ways to approach investing. Before selecting a broker, be sure to review the best online brokers to compare features.
Sentiment tools are also increasingly popular in brokerage apps, allowing users to gauge market sentiment from social media and other platforms. This facet of the brokerage experience may become increasingly important in a 24-hour trading scenario.
What Is Usually Considered the Biggest Risk of Market Timing?
One major risk of market timing is missing out on opportunities; missing a recovery after exiting a position during a downturn, for example, or getting caught buying a security near or at the peak of its price.
How Can Traders Stay Updated With the Latest Trends and Technologies in 24-Hour Markets?
Investors should know that companies will have to adapt to a 24-hour market. Publicly traded firms will need to adjust how they approach releasing news to investors, while exchanges and brokerages will adapt their tools and offerings to reach the broadest audience. For many investors, a cautious, watchful approach will likely win out during this time of transition.
Who Should and Shouldn’t Be Involved in 24-Hour Trading?
Twenty-four-hour trading may provide a big benefit to investors outside of the U.S., who will now have access to markets that would typically be active overnight. Institutional investors, already commonly involved in extended-hours trading, are also likely to continue to benefit from longer trading hours.
The Bottom Line
As a 24-hour trading cycle becomes increasingly common, investors will be forced to adapt to a trading ecosystem that no one can fully anticipate. Extended-hours trading offers some cautionary examples—the risk of higher volatility and lower liquidity, for instance—but some or all of these concerns may change as the most popular exchanges shift their trading windows. Investors should approach 24-hour trading with caution, keeping in mind that the temptation to overtrade will be strong.