The Truth About Pre-Markets
The secret behind the Pre-Markets strategy is to make use of existing market volatility to drive up the share price of an underlying trade without needing to have the foresight to create a whole new market in advance. The theory is that a select group of individuals will control the pre-markets that, given away to their associates, will enable them to trade ahead of the crowd and therefore profit from the share price increase. However, there are several problems with this approach. For example, if everybody else invested the same amount of money as you, then theoretically you could justifiably be able to charge much more than everyone else for the same amount of equity.
The reason why many people do not believe in Pre-Markets is because they do not realise that even in a perfectly functioning market, there are inherent instabilities which can affect the value of currencies. For example, currency exchange rates are sensitive to changes in world economic news. When world leaders are reported to be speaking against a particular currency – for whatever reason – the effect it has on the exchange rate of that currency can be significant. In the real time forex markets, this does not have much of an impact on the value of currencies per se; but investors do feel a great deal of comfort in trading in their favourite currency regardless of the economic situation in other countries.
To the average trader, the concept of Pre-Markets sounds attractive. However, many investors are put off by the complexity of the execution mechanism involved in the Pre-Markets option. Some institutional investors do not want to see their investment in other currencies being manipulated in a manner that might result in a large loss. It is this complexity that often scuppers the Pre-Markets concept altogether.