Monday/Tuesday Trade In Nasdaq In The S&P 500 And Nasdaq (Trend Reversal)
Last Updated on June 19, 2022
Today we’ll present a strategy that we first wrote about some years ago – an article called big moves on Mondays – but we have made a small twist to the strategy. We call the strategy for the Monday Reversal Trading Strategy and it works pretty well on the S&P 500 and Nasdaq.
Additionally, we update the original article with newer data and test it from 1980 up to June 2021. Prior to 1980, the strategy performed poorly.
Table of contents:
The Monday reversal trading strategy in the S&P 500 and Nasdaq
Why do we trade on a Monday and not the other days? Because Mondays are part of the Tuesday turnaround strategy.
Mondays have historically tended to reverse big moves – both up and down. To exploit this tendency, or perhaps we can call it a seasonality, some years ago we made a strategy based on this.
However, the strategy can be improved. We added another criterion to the exit and rewrote one criterion on the entry:
The Monday reversal trading strategy in plain English:
In plain English the strategy is like this:
- Calculate a 25 day average of (h-l).
- Today is Monday.
- Close today must be at least lower than (from Friday) 0.25 of average in number 1.
- (c-l)/(h-l), the Internal Bar Strenght Indicator, must be lower than 0.3.
- If conditions in 2, 3, and 4 are met, go long at the close.
- Exit at the close on Friday or when the close is higher than yesterday’s high.
Although having six points the Monday reversal trading strategy is still pretty simple.
The strategy’s performance in the S&P 500
If you invested 100 000 in this strategy in 1980 and reinvested/compounded the equity until June 2021, you would have fared like this (S&P 500):
The CAGR is 5.7% and you would have been invested only 4.4% of the time. Because of the limited time in the market, the max drawdown is 23% which happened during the bear market in 2002/03.
During the FGC in 2008/09, the Monday reversal trading strategy performed pretty well with a 25.5% gain.
All in all, the number of trades is 326 and the average gain per trade is 0.73% and the profit factor is 3.24.
We believe these are pretty good numbers for such a simple idea!
The annual returns look like this:
The strategy’s performance in Nasdaq:
If we test the exact same criteria on the Nasdaq and the ETF with the ticker code QQQ we get this equity curve:
The average gain per trade is 1.1% over 158 trades. The CAGR is 7.5% – pretty good considering the strategy is invested less than 5% of the time.
Conclusion:
The Monday reversal trading strategy seems to be a real inefficiency in the markets that has lasted for over 40 years.
Will it continue? That is, of course, always the big unknown in trading.
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A remarkably well-timed article!
Yes, I hope more people are in 🙂
Great to see a post again! How about a recap-post of your previous trading results?
Hi, thanks. I mainly spend my time on long term investments now. Daytrading just to pay my bread and butter.
Oddmund,
Is your formula (h-l)/c correct?
That does not seem to make sense.
Thanks for checking.
It’s just to have a number for relative volatility.
Hi Oddmund,
Looking at SPY from Jan 2005 to Feb 2016, it rose in value approximately 99%. By comparison, this algorithm’s performance when trading SPY, only returns ~93% (excluding commission and tax). It seems this algo often under performs vs. the ETF or stock it is trading meaning the better move is often to just make long term investments on the target securities and then wait it out (especially when you do factor in taxes and commission).
In what cases is this algorithm better than just going long on your target?
Results from my own implementation: http://imgur.com/vzQk8xs
I don’t know how much does a risk free asset, like a government bond, pays in the US, but in Brazil, if this strategy works for Ibovespa (São Paulo Stock Exchange’s Index), it could make sense even if Ibovespa over performs the strategy. Because since you won’t be holding the security all the time (because of the conditions to enter the trade), when your money is in hand, it will be invested in such a bond, monetizing gains that you wouldn’t have if it was all invested in your long position on the security. So, your gains will be the strategy gains PLUS the gains you will have when NOT holding a long position on the security. At this moment, government bonds in Brazil pay 14.13% per year! Even if you consider inflation, Brazil has a real interest of 4-5% a year!
Yes, you are right, but drawdown is much bigger by holding. Commission should be very small, but of course taxes is another issue. It’s about risk, in my opinion. Because drawdown is so much lower, perhaps using gearing might be appropriate, but I’m not recommending anything.
Thanks for sharing, Oddmund.
I applied the rules on the S&P E-mini and Dow E-mini (since 2007).
The performance gets even better for IBS < 0.5
Hi,
I don’t understand point 2. Are you comparing closing price with (h-l)/c ?
so is it c < 0.25 [(h-l)/c]_{ma25 @ friday} ?
Assume 25 day average of (h-l)/c is 1%. Then SPY must fall 25% of that, ie 0.25%.
Concerning the post from Jay A.
Does this stragie really underperform? I don’t know. I’m still working on a backtest…
How do you made your backtest? Fixed number of shares? Or in % depending on your equity?
Maybe today or tomorrow I can finish a backtest. I’ll have a look to the loosing positions… Maybe there is some potential with adding a stop… maybe a huge range “panic stop” will be enough?…
Only some thoughts from my side 🙂
Hi, fixed number of shares.
Close today must be at least lower than (from friday) 0.25 of average in number 1
could not understand this sentence
is it close(Monday)< close(prev Friday) after that could not understand, could you convert
Hi,
If (H-L) average is 1.5%, then SPY must fall at least 0.25 of that, ie. 0.375% (from close friday to close monday).