Night Strategies Trading (Overnight Trading Strategies)

Last Updated on May 23, 2023

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.

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.

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?

Have a look at this chart that shows the accumulated returns of owning the S&P 500 from the close to the open next day:

The chart shows 100 000 invested and compounded in the ETF SPY from 1993 until May 2021. Clearly, there is a solid 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 money 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 0.04% 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 May 2021 gives a CAGR of 35%!

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:

• Compounding strategy

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 May 2021 you have lost 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!

The overnight trading strategies require 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:

• An overnight short trading strategy in the S&P 500
• 4 Overnight Trading Strategies In The S&P 500
• Overnight trading strategy in the S&P 500
• Monday Overnight Reversal In The S&P 500 (Short strategy)
• The 5-day low overnight trading strategy
• The 3-day down overnight trading strategy in the S&P 500

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.

We end the article by giving you a humble reminder of what we do on this website:

We are publishing overnight strategies and edges in our subscription service:

Below we give you three equity charts of overnight edges we have made for the subscription service (in the S&P 500 and Nasdaq):

Free night and overnight trading strategies in the S&P 500:

We have a landing page where we have 70+ free trading strategies we have published since 2012. That page consists of several overnighters. Alternatively, you can order a PDF file where we have summarized all the 60+ strategies into one file with Amibroker code:

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.