The 5-Day Low Overnight Trading Strategy

The 5-Day Low Overnight Trading Strategy focuses on trading the S&P 500 when it opens at a 5-day low but closes higher than its opening price. This strategy involves entering trades at the close and exiting when the market opens the next day.

Overnight trading in the S&P 500 historically yields an average return of 0.04% from the close until the next day’s open, making it attractive for mean reversion strategies.

During a test period from 2005 and forward, the strategy produced an average profit of 15.93%, with an average return of 0.26% per trade. Excluding the biggest winner of 6% in October 2008, the average profit remains at 0.17%.

The S&P 500 has shown strong mean reversion tendencies for many decades. One reason for this is the tailwind in the form of 0.04% average return from the close until the next day open, so-called night trading, the lowest hang fruit in the tock market.

This article looks at the performance of the overnight session when the S&P 500 opens at a 5-day low but at the same time, the close is higher than the open.

Let’s turn this into a testable trading strategy:

The 5-day low overnight trading strategy

Here is the testable trading strategy in plain English:

Trading Rules

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We have previously written about a 5-day low strategy in SPY.

The trading rules are straightforward, but trading is not about complexity but about making money on simple ideas via plenty of different trading ideas.

We backtest the trading rules on the S&P 500 by using the ETF with the ticker code SPY from 1993 until today:

Let’s look at the statistics and trading performance metrics:

  • 175 trades
  • The average gain per trade is 0.31%
  • The win rate is 62%
  • Max drawdown is 13%

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.

five-day-low

What is the “5-day low overnight trading strategy” in the S&P 500?

The 5-day low overnight trading strategy involves trading the S&P 500 when it opens at a 5-day low, but the close is higher than the open. Traders enter the trade at the close and exit at the open the next day.

Why is there a focus on overnight trading in the S&P 500?

There is a focus on overnight trading in the S&P 500 because you have an edge in the long term upward trend in stocks. Overnight trading in the S&P 500 often provides a 0.04% average return from the close until the next day’s open. This makes it an attractive aspect of the stock market for mean reversion strategies.

What is the historical performance of the 5-day low overnight trading strategy in the S&P 500?

The strategy has shown an average profit of 0.3%

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