Is This Still The Best Reversal Strategy?

ByOddmund Groette Trading strategies

Today, we look at what we regard as the best reversal strategy.

For decades, markets have shown a surprisingly persistent tendency to rebound early in the week after a rough start. It is simple and easy to backtest (and to trade).

Despite being one of the oldest short-term edges in the stock market, the Turnaround Tuesday effect still refuses to die. We first mentioned it (and backtested it) on our website as far back as 2012.

The Turnaround Tuesday strategy is one of the classic mean-reversion patterns in the stock market. The idea is straightforward: when the market falls (sharply) on Monday, there is often a higher-than-average chance of a rebound on Tuesday.

It sounds almost too simple. But that is exactly why it is so interesting.

Many trading strategies are overcomplicated. They rely on dozens of indicators, filters, and rules that make them look impressive but hard to trade in real life.

Turnaround Tuesday is different. It is built on a basic market behavior: short-term fear often gets overdone, and when traders rush to sell at the beginning of the week, the market can quickly snap back.

In this article, we look at how it can be tested and whether it still offers a tradable edge today. Because sometimes the best reversal strategy is not the newest one. It is the one that has survived long enough to prove it still matters.

Let’s backtest it:

Is This Still The Best Reversal Strategy?

The strategy has worked well for the S&P 500 over four decades, including the 2008 financial crisis, so this time we backtest SSO. SSO is the ticker code for an ETF that uses 2x leverage for the S&P 500, so beware the risks.

This is the performance:

Is This Still The Best Reversal Strategy
Is This Still The Best Reversal Strategy

Performance

  • No. of trades: 181
  • Average gain per trade: 1.2%
  • Win ratio: 70%
  • Profit factor: 2.5
  • Annual returns (CAGR): 12%
  • Exposure/time in the market: 10%
  • Risk-adjusted return: 111% (CAGR divided by time spent in the market (0.1))
  • Max drawdown: % (buy and hold 59%)

Trading Rules

We made the following rules:

🔒 These trading rules are for members only.

– Today is Monday;
– The close must be lower than Friday’s low.
– Sell at the close when it ends above yesterday’s high;
– Or after 4 trading days (On Friday).

Amibroker code:

UpVolume = IIf(C>Ref(C,-1),V,0);
DownVolume = IIf(CRef(H,-1);
sellPrice=Close ;

Short= Cross(VolumeRatio,6) AND Day()<25; shortPrice=Close; Cover=C

Get access here

I’ve got an Msc from Heriot-Watt University, Edinburgh (1996), in addition a to a business administration degree the Norwegian School of Management (BI – 1994). Did my mandatory military service in between.

After university, I worked two years as an auditor (1996-1998).

I co-founded Aksjeforum.com in 1998/99 - one of the first websites about trading and investing in Norway. It was later acquired by Digi.no in 2001.

I have written 4 books about trading (in Norwegian). One of them has sold 30,000 copies, a record for a financial book in Norway.

From 2001 until 2018 full-time independent prop trader (Series 7 in 2001) and investor.

2018-today: Investor, writer, analyst.

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