The First Trading Day of the Month Trading Strategy: Strategies, Backtest Insights, and Performance Analysis

The first day of the month seasonality is strong in most markets. We have previously written about the turn of the month trading strategy, but today we look at the first trading day of the month.

The turn of the month includes the end of the month and the first three trading days of the new month. Let’s look at only the first trading day of the month: How does the first trading day of the month perform? In this article, we look at the first day of the month seasonality in the S&P 500.

The first trading day of the month shows abnormal returns and thus hands us some excellent trading opportunities.

The first trading day of the month

Let’s first define what the first trading day of the month is:

This has nothing to do with the calendar day. The first trading day of the month is exactly what it says: the first day of trading. If the first calendar day of the month is on a weekend or a holiday, the first trading day of the month is not the first calendar day.

The return on the first trading day of the month

Let’s check the return from the close of the last trading day until the close of the first trading day of the month. This is the result of the SPY from its inception in 1993 until today:

The best days were up until the GFC in 2008/09. The average return is 0.25% – significantly better than any random day, which has risen 0.04%. It is worth noting that the performance is pretty linear all the way. The win rate is 63%.

The average gain has been 0.18% since 2010. Thus, the strategy still has some energy left.

If we look further back, we can see that the strategy didn’t work very well (GSPC – the S&P 500 cash index) until the mid-80s:

Futures trading started in 1982, and we suspect that has something to do with the change in seasonality.

Ok, we have established that the first trading day of the month is positive from the close of the month until the close of the first trading day of the month. But does the gain com from the close to the open or from the open to the close?

The gain from the close of the last trading day until the close of the first trading day is evenly divided between close to open and open to close. This is the return from the close until the open of the first trading day of the month:

The average gain is 0.12% per trade.

Let’s backtest the performance from the open to the close on the first trading day of the month. Below is the equity curve from SPY’s inception in 1993 until today:

The average gain per trade is 0.14% – thus, the gains are almost evenly distributed from the close to the open and from the open to the close of the first trading day. The “day trade gains” are far higher than on any random day (which is around zero).

We have in a previous article looked at the returns in the S&P 500 divided between the night/overnight session and the daytrading session: Night strategies trading (overnight edges/strategies)

The first trading day of the month effect can be improved

We have developed two trading strategies that take advantage of the strong seasonal tailwind from the first trading day of the month.

The first one is strategy #65, and this is the equity curve:

The 198 trades have returned 0.68% per trade, and the win rate is 78%. Although you are invested only 7% of the time, it has returned 4.3% annually. This is a risk-adjusted return of 56%.

You will find the strategy among our premium trading strategies.

The second premium strategy that is based on the first day of the month is strategy #89. It does not trade that often. This is what the equity curve looks like:

There have only been 58 trades from 1993 until today, but the average gain is huge: 1.12%. Even though you are invested only 2% of the time, you get a 2% annual return. This equals a 94% risk-adjusted return!

The first trading day of the month strategy:

As you can see from the number, trading around the first trading day of the month can be profitable. The returns from the close of the last day until the close of the first day are abnormal, and so are the returns from the open to the close of the first trading day.

The first trading of the month trading strategy works. However, as always, we recommend doing your own research to find out that backtesting works.

FAQ:

– What historical returns does the S&P 500 exhibit on the first trading day of the month?

The historical return on the first trading day of the month for the S&P 500 has shown abnormal returns, with an average gain of 0.25%. The strategy has been notably effective, particularly before the Global Financial Crisis (GFC) in 2008/09.

– How does the return from the close of the last trading day to the close of the first trading day perform?

The return from the close of the last trading day until the close of the first trading day has an average gain of 0.25%, significantly outperforming random days, which have a 0.04% average gain.

– What is the average gain per trade for the first trading day of the month strategy?

The average gain per trade for the first trading day of the month is evenly distributed, with 0.13% from the close to the open and 0.12% from the open to the close. These gains are notably higher than those observed on random days.