4 Overnight Trading Strategies In The S&P 500 (Strategies From Close To The Next Open)

Last Updated on July 22, 2021 by Oddmund Groette

The overnight edge in the stock market is well documented:

By using the tailwind from the close until the next open, you can develop some good short-term trading strategies. In this article, I present 4 overnight trading strategies in the S&P 500. The strategies buy at the close and sell the next day’s open. Because the holding period is short, the drawdowns are also small.

(The strategies in this article were written in 2012. The test period is from October 2005 until 2012.)

Overnight trading strategy number one:

Here is the first strategy:

  1. SPY closes at new 20 day low
  2. Close is above the 200-day moving average.
  3. (c-l)/(h-l)<0.5.
  4. Go long at the close, exit at tomorrow’s open.

 

P/L in % #trades #wins Avg.
8.4 35 29 0.24

The criteria about the close must be above the 200-day moving average is important. The equity curve gets a lot worse without it.

Overnight trading strategy number two:

  1. SPY closes at a new 5 day low.
  2. Close is above the 200-day moving average.
  3. (c-l)/(h-l) gives a ratio lower than 0.4.
  4. Go long at the close, exit at tomorrow’s open.

 

P/L in % #trades #wins Avg.
12.6 90 64 0.14

Most trades are below 0.4 (criteria 3) anyway. Here is the equity curve for this strategy:

 

This is a pretty nice equity curve! The profit factor is 2.6.

What happens if we turn it upside down and go short? It gets a lot more erratic. There is a small negative edge, but not tradeable. However, nice to know, though (not to go long these times).

Overnight trading strategy number three:

  1. RSI(5) is below 25.
  2. Close is above the 200-day moving average.
  3. (c-l)/(h-l) gives a ratio lower than 0.5.
  4. Go long at the close, exit at tomorrow’s open.

 

P/L in % #trades #wins Avg.
13.57 59 46 0.23

The equity curve is just as upward sloping as the one above and has a profit factor of about 3.8. Here is the annual return trading 490 000 USD per position:

 

Overnight trading strategy number four:

  1. (c-l)/(h-l)<0.5
  2. RSI(5)<30
  3. Close is lower than the 50-day moving average

 

P/L in % #trades #wins Avg.
36.55 168 109 0.23

The result is quite impressive. Why is it good? Probably because the market is short-term oversold and gets a quick bounce up from a bad day.

Buying if the close is above the 50-day average is no good at all using these criteria. Quite a difference from the above strategies that went long if above 200 the day moving average.

If holding to the close instead of selling at the open, the total P/L increases to 80% but the equity curve is a lot more erratic. So buying on a 5 day low is a lot better for holding several days.

From previous research, I know there is a good chance of filling the gap if SPY opens down and is short-term oversold. So I put in a new twist: if SPY opens lower (the next day) than -0.1%, simply hold until the close (but exit at the open if opens higher than -0.1%). This boosts the strategy:

P/L in % #trades #wins Avg.
55.81 168 129 0.33

Here is the profit curve of the last twist to the strategy:

 

 

 

 

 

 

 

 

In the last years, it has paid off to hold this position until the next day’s close even on days when SPY opens up. But this was not the case earlier.

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Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.