You’d think after I finally got a win over Robinhood I’d love to try again, but I’m not. In fact, exactly the opposite. Here’s why I won’t make another attempt.
The foolproof plan
Robinhood offers “extended trading” hours until 6:00 PM Eastern Time on market days. This gives Robinhood investors the ability to trade using information that was not available during normal market hours (which are typically 9:30 a.m. to 4:00 p.m. ET). Most retail investors should wait until the market opens on the next trading day.
Pre-market and post-market trading has been around for a long time, but previously was only available to large investors and institutions. Today, electronic networks can automatically match buyers and sellers outside of trading hours, enabling low dollar transactions on platforms such as Robinhood.
For the perfect after-hours trade, I researched a company that had to report profits after the market closed. When the earnings release came out I would read it quickly, and if it looked positive I could quickly grab stocks, bet on the price rise when the market finally opened, and sell for a quick profit.
What could possibly go wrong?
Extended trading means extended wait
I decided to buy shares in a precious metals streaming company Wheaton Precious Metals (NYSE: WPM), which was due to release second quarter results after the market closed on August 12. I thought – he might be ripe for a rally if his earnings report was good.
A few minutes before 4:00 p.m. I had the Wheaton Precious Metals webpage on my browser and the Robinhood app launched on my phone. The instant the clock passed 4:00 p.m., I refreshed the page.
I refreshed it again at 4:01 am.
And again at 4:02 a.m.
And at 4:03 am.
At 4:05 pm I realized that I really had no idea how long “after market close” the Wheaton results release would take place. I really wanted to beat the market… but I had more to do than sit for an hour doing nothing but refreshing my browser. There were cat videos to watch, by golly!
I decided to check in every five minutes instead. At 4:30 p.m., I decided that every ten minutes would be better. Finally, at 5:10 pm, he was there: the results report! It was time to move.
It’s the little things in life
The earnings report looked positive at first glance – my plan didn’t really give me much time to read it – so I hopped over to Robinhood and at 5:12 pm was running my trade. At least I thought I was.
It turns out that, Robinhood does not allow you to trade fractional shares during extended trading hours (which doesn’t seem to be revealed anywhere on the app unless you try it and fail). So I had to cancel my first trade and buy an entire share instead, which was executed at $ 49.75 / share around 5:14 pm.
The next morning I was ready for Robinhood and sure enough Wheaton shares jumped to… $ 50.58 / share! I hit an imaginary sell button (imaginary because for compliance purposes I had to hang on to the action), and locked in a profit of $ 0.83!
It doesn’t sound like much, but remember, I only bought one share. In percentage terms, it was actually a profit of 1.7%. Which is… still not much.
Why it does not work
High frequency traders can make this strategy work for them as they have huge amounts of capital to deploy, as well as sophisticated tools and algorithms that can quickly collect data and make near instantaneous trades based on of this information. The rest of us are stuck refreshing our browsers.
Wheaton closed on August 12 at $ 49.35 / share. Its price didn’t start to climb in the aftermarket until its results were released a few minutes after 5:00 p.m. If I could have instantly bought at $ 49.35 and sell at $ 50.58 I would have gotten a 2.5% return: still not much, but a decent return overnight if you trade thousands or millions of dollars in stocks and your computer does all the work on its own.
In the end, even a 2.5% yield isn’t worth hovering over my screen for more than an hour. And remember, I was lucky. If Wheaton had issued a bad profit report and his stock had fallen, all of that time I spent would have been wasted.
The winning strategy
Instead of trying to beat high-frequency traders – and Robinhood himself – in a game where they hold all the cards, a better strategy is to find high-quality companies that are likely to outperform, and outperform. buy and hold stocks for the next 3 to 5 years. Not only will you benefit from compound returns, but you can do something productive – like watching cat videos – while your money is doing the work for you.