Last Updated on June 19, 2022 by Quantified Trading
This article presents a last hour trading strategy. This is in practice a momentum strategy.
Here is the hypothesis: if SPY rallies from the open and until the last hour, can we make money by going long one hour before the close and exit on the close? This is a “last hour” trading strategy:
The momentum day trading strategy in the S&P 500 – long
Previously I have written about the different periods of the trading day:
- At what time of day does SPY set high and low?
- SPY sets low or high in the last hour – a daytrading strategy
- Return in the first hour, middle of the day, and the last hour
This is a strategy I have traded live over the last year (just a few trades). I have tested with different thresholds, but it seems like the more SPY is up from the open (it works better from the open than from yesterday’s close), the more likely to rally the last hour.
I have used a threshold of 1.25% from open to the last hour, and I get 18 fills from 2010 until the present and 13 winners. This is an average of .39% per fill, not bad for such a short holding period.
Considering a total holding period of 18 hours over more than 2.5 years, a total gain of 7% must be considered extraordinary.
Here is the equity curve:
There are few fills, though. Increasing the threshold to 1.5% we get 8 fills and 6 winners, and the average increases to 0.49%.
If I measure from yesterday’s close to the last hour, I don’t get such remarkable results. I’m not sure why. Does anyone of the readers have any suggestions?
It’s still good, but the average drops. Here are the results from yesterday’s close to last hour:
The momentum day trading strategy in the S&P 500 – short
To reverse it, ie. to go short if a large drop from the open, does also work (see below for explanation).
For small movements, there seems to be a tendency downwards, but large drops get reversed.
However, measuring from close until the last hour my results are a bit disappointing. Using from the open I get tradeable results using a threshold of about 1.5%, but 1.75% seems better (the more movement the better). Here is the equity curve for 1.75% (15 fills, 8 winners):
Why does this strategy work? I have no idea except for the following:
- Short covering, or
- rebalancing in ETFs
There are a lot of traders who fade SPY. If SPY just continues higher, a lot of them might want to take a stop-loss by covering and thus needs to buy (and they may take profits on big down days and buy during the last hour).
The other reason is the growth in leveraged ETF’s. A lot of the leveraged ETF’s needs to rebalance every day and this pushes more fuel to the fire.
When the market goes up leveraged bull ETFs need to buy more to keep the leverage ratio. When the market drops, it’s the opposite effect, because bear ETF’s need to buy.
According to academic research papers, as much as 10-50% of the MOC orders could be attributed to these ETF’s!
In another article, we looked at the return during the last hour of trading. The trading edges are small, but this article shows that there are possibilities to find market inefficiencies. There are several ways to go about in order to inefficiencies in the markets.
However, day trading is hard and we believe overnight strategies are easier prey to hunt for.
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