Since 1993, all the gains in the S&P 500 have come from owning the index from the close to the open the next day. We see the same tendency in the gold markets. Thus, we can develop night trading strategies to take advantage of this bias. At the end of the article, we update the results of an overnight trading strategy we published in 2014.
Night and overnight trading strategies
Here you can find all of our Night Trading Strategies.
Overnight stock trading strategies are popular for a good reason: they offer good risk and reward. All markets are different and have their own seasonalities and tendencies, but in the stock market, the tendency is for the gains to accrue during the night – ie. an overnight bias. This means that night trading and overnight trading strategies in stocks get a boost from this effect/bias.
What is night trading?
By night trading we mean holding positions overnight – from the close of the trading day until the open the next day. In other words, night trading is the same as overnight trading.
Let’s give you an example:
The official market hours for the stock market are 0930 to 1600 Eastern US time. Thus, night trading owns the “stock market” from 1600 until 0930 the next day.
In this article, we refer to the stock market as the S&P 500 or Nasdaq.
Overnight Trading Strategy (+Backtest) | NIGHT TRADING video
Night trading and overnight trading is not after-hours trading
After-hours trading is when you buy and sell between the official market hours.
Overnight trading is not like that. You place orders at the close or just seconds before the close. You sell at the open the next day or put in a limit or market order at or very near the opening bell.
Why night trade?
As you’ll see from the statistics further below, there are good reasons why you should keep positions overnight, at least in the stock market.
How does night trading work?
As you’ll learn below, some markets rise during the night period. This is something you can take advantage of when you are building strategies:
You are looking to find edges from holding from the close to the next open. The time frame is short, but there are reasons why this should work.
Why hold positions overnight?
Did you know that practically all the gains over the last 30 years have come overnight?
Just have a look at this chart that shows the accumulated returns of owning the S&P 500 from the close to the open the next day since SPY’s inception in 1993:
The chart shows 100 000 invested and compounded in the ETF SPY from 1993 until today. Clearly, there is an edge! You have a nice tailwind you can take advantage of when building strategies:
The average gain of holding the S&P 500 from the close until tomorrow’s open is 0.04%. It’s tiny and is, of course, not enough to make it worthwhile if we include slippage and commissions.
Is it only in stocks that we have an overnight edge?
No, it turns out we have the same tendency in gold (GLD):
You get a tailwind of about 0.03% by owning gold from the close until the next open.
If we look at gold miners (GDX) the edge is even bigger:
100 000 compounded from 2007 until today gives a CAGR of 30%! Of course, the edge is not tradable, but you can most likely find some very nice trading rules by using this edge.
Why is there an overnight bias in the markets?
The reason is most likely due to inflation and earnings growth over time.
Moreover, there is added risk by holding overnight. Thus, in the long-term, you should get rewarded for undertaking this risk and that’s probably one of the main reasons why the stock market tends to rise during the night.
While you are sleeping, drinking beer with your friends, watching TV, or reading a book, your capital is at work. Isn’t that wonderful? This is the reward you get for delaying gratification to the future:
When the markets open, any macro news, earnings, or whatever news there are get discounted rapidly. Can you still profit during the opening hours the next day?
Is day trading worth it?
If you’re a day trader in stocks it turns out you can’t get any help from the long-term tailwind from owning stocks.
What happens if you are invested in the S&P 500 from the open to the close? The chart below is pretty sobering:
From 1993 until today you have made zero money by buying on the open and selling on the close every trading day.
In other words, all the gains of owning stocks have come from holding overnight – during the night while you were making love to your partner. Multi-tasking can be profitable and enjoyable!
For the gold miners (GDX), the statistics are even worse. If you own the GDX from the open to the close every day you’ve had the following returns:
The average gain is minus 0.09% which results in a CAGR of -25%. Pretty miserable!
Overnight trading backtesting
Despite the long-term drift upwards overnight, you need to make solid overnight trading strategies to make up for slippage and commissions. Unfortunately, it is not as easy as it seems if you want to trade the overnight bias compared to just “buy and hold”.
However, we have published both free and paid strategies and edges that profit from the overnight bias. For example, these overnight trading strategies which we made several years ago (2014) are still working pretty well:
Seven years of out of sample gives this equity curve of the last linked strategy above (3 down days in a row):
2015 and 2016 were flat, while the strategy picked up steam again later. 2020 was a good year with over 6% gains while being invested just a fraction of the time. But overall, it has performed well.
More Night and overnight trading strategies
One other option, instead of trading from the close to the open, is to trade from the close until the close 24 hours later. We might argue this is not an “overnight” trading strategy, but at least it’s pretty similar. You own S&P 500 for 6.5 hours more.
We have made trading rules and backtested 3 such 24-hour trading strategies. They are available as a bundle (#5) from our trading strategy bundles landing page. All strategies have been published earlier either as free or behind a paywall, and thus ut have out-of-sample-data (they have performed well).
Below is the equity curve if all three 24-hour trading strategies are combined as a portfolio:
There are 950 trades with an average gain of 0.33%. This is more than enough to offset slippage and commission.
Free night and overnight trading strategies in the S&P 500:
We have a landing page where we have 200+ free trading strategies we have published since 2012. That page consists of several overnighters.
We have summarized most of the articles into trading rules and code. You find all the articles on this link:
Conclusion about night trading and overnight strategies
We believe overnight stock trading strategies are low-hanging fruit, thus any aspiring trader should consider night trading. You won’t get rich by holding and trading overnight, but it can pay for your bread and milk with reasonable risk.