3 Days Down Overnight Trading Strategy

Introducing the “3 Days Down Overnight Trading Strategy”: This strategy focuses on the S&P 500 index, tracking its movements over a three-day period. If the index closes lower for three consecutive days, a trade is entered at the close of the third day and exited at the following day’s open. Originally introduced in 2013, the strategy has been revisited with updated data. Backtesting reveals a win rate of 65% and a maximum drawdown of 8%. Further adjustments, such as exiting at the next day’s close instead of open, have shown improved average gains but with a slight trade-off in win rate and drawdown. Modifications have also been made to enhance performance, including reduced exposure and smaller drawdowns.

Here is a simple mean reversion twist in SPY that holds the S&P 500 just one day (from the close to the next day’s open or close). It’s an overnight trading strategy, the lowest-hanging fruit in the stock market (?).

This article was initially published in 2013, and it’s about time we updated it. We thus have plenty of out-of-sample data.

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The 3-day down overnight trading strategy

In plain English, the trading rules of the strategy reads like this:

Trading Rules

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Here is the equity curve from 1993 for SPY, which tracks S&P 500, until today (backtest done in Amibroker):

There are 661 trades, and the average gain per trade is 0.13%. This might not sound much, but in a liquid asset like SPY, this might be tradeable even though slippage and commissions are not included in the backtest. Please read our article about realistic slippage and commissions for liquid ETFs.

The win rate is 65%, and max drawdown is 8%.

Let’s change the rules and exit on the close instead of the open:

Exiting on the close the next day is even better: the average gain increases to 0.24%.

The drawback is that the win rate drops to 61%, and max drawdown increases substantially to 17%. The CAGR is 5% despite spending just 8% of the time in the market.

The strategy also works for Nasdaq 100 (QQQ) and many stocks, but not as well as for S&P 500.

Can the strategy be further improved?

Yes, in our Monthly Trading Edge for March 2022, we made a modified version of the strategy above that returned the following equity curve (less time in the market and smaller drawdowns):

• No. of trades: 419
• Average gain per trade: 0.35% (1.35% for winners and -1.15% for losers)
• Win ratio: 60%
• Profit factor: 1.78
• CAGR: 4.5% (assuming no leverage)
• Exposure/time in the market: 5%
• Risk-adjusted return: 84% (CAGR divided by time spent in the market which is 0.05)
• Max. drawdown: -10%

In the bear market of 2022 (out of sample), the strategy made 35 trades and the average gain was 0.3%.

The last strategy is one of 3 strategies that are part of the Three 24-Hour Day Trading Strategies Bundle.

If you would like to have the Amibroker and Tradestation code for this strategy, you might want to consider becoming a member and get access to plenty of strategies and trading ideas.

For more trading strategies, have a look at all our profitable trading strategy types.

How does the 3 Days Down Overnight Trading Strategy work?

This strategy works by monitoring the S&P 500 index for three consecutive days of decline. If this pattern occurs, a trade is entered at the close of the third day and exited at the following day’s open.

What are the performance metrics of the 3 Days Down Overnight Trading Strategy?

The performance metrics of the strategy yielded a win rate of 65% with a maximum drawdown of 8%. On average, each trade resulted in a gain of 0.13%.

What adjustments have been made to improve 3 Days Down Overnight Trading Strategy’s performance?

The adjustments that have been made to improve the strategy include exiting trades at the next day’s close instead of open, resulting in improved average gains. However, this adjustment slightly reduced the win rate to 61% and increased the maximum drawdown to 17%.

Can the 3 Days Down Overnight Trading Strategy be further improved?

Yes, a modified version of the strategy was introduced in March 2022. This version demonstrated a higher average gain per trade (0.35%), a win ratio of 60%, and a reduced maximum drawdown of 10%.

How does the 3 Days Down Overnight Trading Strategy perform in different market conditions?

In the bear market of 2022, the strategy executed 35 trades with an average gain of 0.3%. This suggests some adaptability to varying market conditions, though further analysis might be needed to fully assess its performance.