Overnight Reversal Strategy

Discovering profitable trading strategies can be both exciting and challenging. One such strategy, known as the Overnight Reversal Strategy, focuses on capitalizing on potential market reversals that occur specifically on Mondays and Tuesdays. By analyzing historical market data, this article explores the effectiveness of this strategy and provides insights into its implementation and outcomes. Let’s delve into the details of this intriguing trading approach.

Mondays have turned out to be reversal days, at least on the long side after a fall on Mondays or the days leading up to Monday. Let’s test a reversal trading strategy:

In this article, we test a Monday overnight reversal trading strategy in the S&P 500: we go short on a Monday or Tuesday when the close is at a 20-day high. (Update: this strategy has not performed well after 2017.)

Overnight Reversal Strategy

In plain English, the strategy is described like this:

1. SPY closes higher than the previous 20-day close (not the 20-day high).
2. Today is either Monday or Tuesday.
3. Go short at the close.
4. Exit at tomorrow’s open.

This works for all days except for Thursdays. A pretty similar strategy is the Turnaround Tuesday strategy.

This is the results for Mondays from 2005 until February 2013:

P/L %		#fills	#wins	Avg
8.68232		71	44	0.122286

This is the results for Tuesdays from 2005 until February 2013:

P/L %		#fills	#wins	Avg
5.750533		70	40	0.08215

If you would like to have the Amibroker and Tradestation code for this strategy plus 70+ other free trading strategies published on this website, please click on this link:

For more trading strategies, please click here:

• Free trading strategies
• Monthly trading edges (subcription service)

How does the Overnight Reversal Strategy work?

The Overnight Reversal Strategy involves going short on either Monday or Tuesday if the S&P 500 ETF (SPY) closes higher than its previous 20-day close. Trades are initiated at the close and exited at the open of the following day, except for Thursdays.

Why does the Overnight Reversal Strategy focus on Mondays and Tuesdays?

Mondays and Tuesdays are chosen because they tend to exhibit reversal patterns after a fall on those days or the days leading up to Monday. This makes them suitable for implementing the reversal trading strategy.

What are the key criteria for implementing the Overnight Reversal Strategy?

The key criteria include SPY closing higher than its previous 20-day close, the day being either Monday or Tuesday, and initiating short positions at the close, except for Thursdays.

What are the results of implementing the Overnight Reversal Strategy on Mondays and Tuesdays?

The strategy yielded a profit/loss percentage of 8.68% on Mondays and 5.75% on Tuesdays from 2005 until February 2013. It involved a certain number of trades, wins, and the average profit per trade.

Are there any notable exceptions or variations to the Overnight Reversal Strategy?

The strategy works for all days except Thursdays, and a similar approach known as the Turnaround Tuesday strategy exists. However, it’s important to note that the performance of this strategy declined after 2017, as stated in the update.

Conclusion

The overnight reversal strategy, which involves going short on Mondays or Tuesdays when the S&P 500 closes higher than the previous 20-day close, has shown mixed results. While it has demonstrated some profit potential in the past, particularly before 2017, its effectiveness has diminished over time. The strategy, which entails entering short positions at the close and exiting at the open the following day, has yielded positive returns on average, except for Thursdays. Similar strategies, such as Turnaround Tuesday, have been observed. However, it’s essential to note that past performance does not guarantee future success. Investors interested in exploring this strategy further, along with other trading approaches, can access additional information and resources provided on the website.