Premarket movers – stocks trading well above or below their previous day’s closing price or with a lot of volume before the market opens – provide a number of exciting opportunities for day traders. Typically, premarket movers are jumping in response to news or financial releases, so these stocks are likely to see a lot of action once the market opens.
There are a number of ways to trade stocks that have seen price action before the opening bell. In this article, we’ll cover how you can find premarket movers, the challenges that come with trading them, and some basic strategies you can use to profit off premarket gainers and losers.
Finding Premarket Movers
The easiest way to find premarket movers is to use a service that scans for them for you. There are a number of free options available, including MarketWatch, Benzinga, The Stock Market Watch, and Nasdaq. Typically, these services identify not only top 10 or 15 biggest gainers or losers of the premarket session, but also the stocks trading with the most volume ahead of the opening bell.
Alternatively, you can use your own stock scanner to look for premarket movers. This is the preferred method for most day traders, since you have much more control. You can look only for stocks with a certain market capitalization or within a specific industry, or scan for premarket movers above a combination of volume and price change thresholds. Many stock scanners have premade scans for premarket movers that you can use as a starting point for customization.
Understanding Premarket Movers
Not every stock that’s trading up or down in the premarket hours is poised for a trade. There are a handful of things to look for when identifying premarket movers that are worth your attention at market open.
First, volume is key. Premarket trading often happens on low volume because there simply aren’t that many traders active before the opening bell rings. The problem with low volume is that it can send false signals. If a stock is up 10% in the morning, but with only a couple thousand shares being traded to produce that move, it’s unlikely that the upward move will be sustained once more people start trading.
You can identify stocks that are trading in the premarket with decent volume by looking at a moving average of their premarket volume. Or, check the average daily volume of the stock during normal market hours. Premarket moves that are likely to continue after market open often supported by 10% or more of normal volume. When looking at a 5- or 10-minute chart, steer clear of stocks trading with choppy ticks rather than developed bars.
Second, it’s important to consider why a stock is moving in the premarket hours. Is it reacting to a financial release, like an earnings report, or to some industry news? If so, be sure to analyze the news yourself before jumping on the bandwagon of premarket trading. It’s not uncommon to see stocks make big moves on otherwise unexciting bits of news during premarket hours, only to have the gap closed as soon as more analysts and traders digest the report.
How To Trade Premarket Movers
There are a number of different strategies that you can use to profit from premarket movers. No matter what your strategy, though, it’s important to apply the same thinking that you would during normal market hours. Premarket trading activity should point to setups like consolidation or a clear trend. Don’t trade stocks with choppy premarket price jumps just because the stock is up at the time you look.
One specific strategy that many day traders use involves using premarket trading to identify price resistance levels. Channels, ascending triangles, and flag patterns can develop during high-volume premarket trading sessions, or they may continue a pattern from the previous day. In this case, you use the premarket session to inform a breakout trade – once the stock closes above the resistance level encountered during premarket trading, it’s likely that the stock is starting a sharp upward trend.
You can see this in action in the chart below. The premarket trading activity identifies a resistance level that cannot be broken. Later, during the daytime trading session, a break of that resistance level is the start of a sustained upward price movement.
Another strategy looks for gappers and plays on the fact that the majority of gaps created on low volume are closed soon after market open. Keep an eye out for stocks that have gapped up at least 4% without a clear catalyst (such as news) and that are above a support level identified during the previous day’s session. Once the stock begins to move downward after market open, open a short position. It’s highly likely that the stock will fall back down to the previous day’s closing price since there is no support level between it and the current price.
Conclusion: Premarket Movers
Premarket movers provide a wealth of trading opportunities for day traders. Finding stocks that are gapping up or down is straightforward, but make sure that you limit your trades to stocks that are trading with clear chart patterns and on decent premarket volume. Also be sure to look for catalysts that may be causing the premarket price movements, as these can help inform whether you want to trade with or against the gap.