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

Last Updated on February 9, 2023

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. We have an updated version of this article on our Substack service that includes the logic in plain English. Alternatively, you can buy the code for ALL our free strategies)

Overnight trading strategy number one:

The first strategy buys when it makes a new n-day low and has an additional two variables. We go long at the close and exit at the open the next day.

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:

Strategy number 2 is also when S&P 500 makes a new n-day low. Just like in strategy number 1, there are two more variables.

Here are the results:

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:

Strategy number 3 uses three variables, all of different types:

The results are summarized in the table and graph:

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:

Strategy number 4 has, just like all the three previous strategies, three variables. This version is a slight variation of strategy 3:

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.

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.

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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