The Tuesday Reversal Trading Strategy
The Tuesday Reversal Trading Strategy is a method used in the stock market, particularly focusing on the S&P 500 index. It involves observing a consistent pattern of reversal on Tuesdays and implementing trading tactics based on various scenarios, such as the performance of the market on Mondays or consecutive up or down days. Historical data suggests that Tuesdays tend to exhibit strong mean reversion tendencies, making them favorable for this strategy.
Some days back I wrote about daily seasonality in the S&P 500. As a proxy, I use SPY, an ETF. As I have been trading for some years I have noticed there is often a reversal on Tuesdays. Actually, this “fact” has been well-researched over the years. However, I want to measure it myself using my own parameters. Let’s test at reversal trading strategy.
What is the Tuesday reversal trading strategy?
The Tuesday reversal trading strategy trades at the close of a Monday but is against the trend. For example, if Monday was a down day, you buy. If Monday was an up day, you might short. You sell N-days later, or you implement a specific sell trigger.
The Tuesday Reversal Trading Strategy (S&P 500 – SPY)
As you can see from the first article, Tuesdays are indeed the best day of the week over the last years. Tuesdays are very good no matter what has happened before Tuesdays. The last 2.5 years have been much better than the years before 2010.
Here are some potential trading tactics:
If today is Monday, the close is lower than the previous day (Friday), go long at the close. Exit on tomorrow’s close:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | 0.09 | 0.11 | -0.06 | -0.11 | 0.12 |
| #Fills | 51 | 55 | 61 | 56 | 54 |
| #wins | 26 | 33 | 31 | 28 | 31 |
| Max | 4.66 | 2.82 | 4.49 | 2.49 | 4.40 |
| Min | -3.09 | -2.95 | -3.77 | -2.62 | -6.51 |
| Avg. max next 3 days | 1.49 | 1.22 | 1.33 | 1.37 | 1.77 |
| Avg. min next 3 days | -1.55 | -1.68 | -1.59 | -1.62 | -1.32 |
The column Monday consists of the average gain from the close on Monday until the close on Tuesday.
If there are two down days in a row, we get these results:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | -0.06 | 0.10 | -0.65 | -0.13 | 0.23 |
| #Fills | 22 | 27 | 22 | 29 | 28 |
| #wins | 8 | 16 | 6 | 15 | 16 |
| Max | 4.66 | 2.82 | 1.32 | 2.06 | 4.40 |
| Min | -2.78 | -2.95 | -3.77 | -2.52 | -6.51 |
| Avg. max next 3 days | 1.52 | 1.35 | 0.97 | 1.48 | 2.09 |
| Avg. min next 3 days | -1.62 | -1.60 | -2.10 | -1.56 | -1.32 |
Now, if today is an up day, we get the following results:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | 0.18 | -0.04 | 0.11 | -0.01 | 0.02 |
| #Fills | 63 | 74 | 69 | 72 | 72 |
| #wins | 38 | 34 | 41 | 46 | 40 |
| Max | 3.30 | 4.11 | 3.49 | 1.90 | 2.87 |
| Min | -2.35 | -4.42 | -4.69 | -3.52 | -2.00 |
| Avg. max next 3 days | 1.26 | 1.22 | 1.20 | 1.11 | 1.14 |
| Avg. min next 3 days | -1.36 | -1.34 | -1.33 | -1.20 | -1.20 |
If today is the second day in a row up, we get the following:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | 0.08 | -0.14 | 0.16 | -0.07 | 0.00 |
| #Fills | 37 | 42 | 35 | 41 | 45 |
| #wins | 21 | 18 | 22 | 24 | 25 |
| Max | 1.81 | 4.11 | 1.93 | 1.48 | 2.12 |
| Min | -1.95 | -3.69 | -2.20 | -3.52 | -2.00 |
| Avg. max next 3 days | 1.03 | 1.00 | 1.33 | 0.97 | 1.06 |
| Avg. min next 3 days | -1.13 | -1.47 | -0.98 | -1.24 | -1.08 |
What about intraday strategies?
If Monday is a down day (compared to Friday’s close), then go long at tomorrow’s open if the market opens down (from Tuesday’s open). Exit on close:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | -0.12 | 0.17 | -0.13 | -0.11 | 0.00 |
| #Fills | 21 | 31 | 25 | 27 | 25 |
| #wins | 12 | 14 | 11 | 17 | 12 |
| Max | 1.92 | 3.68 | 0.99 | 1.18 | 3.02 |
| Min | -3.98 | -1.82 | -1.54 | -2.86 | -1.79 |
| Avg. max next 3 days | 1.65 | 1.59 | 1.07 | 1.48 | 2.26 |
| Avg. min next 3 days | -1.34 | -1.47 | -1.83 | -1.49 | -1.32 |
Tuesday is the only profitable!
What happens if the market opens up?
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | -0.10 | 0.28 | 0.16 | -0.04 | -0.15 |
| #Fills | 27 | 29 | 29 | 32 | 30 |
| #wins | 14 | 18 | 18 | 14 | 12 |
| Max | 1.61 | 2.99 | 2.08 | 3.59 | 1.24 |
| Min | -2.12 | -1.45 | -2.99 | -2.36 | -1.51 |
| Avg. max next 3 days | 1.50 | 1.41 | 0.91 | 1.30 | 1.21 |
| Avg. min next 3 days | -1.91 | -1.15 | -1.97 | -1.26 | -1.40 |
Tuesdays are even better when the market opens up!
One can make many twists with this. For example, only going long on Tuesdays if SPY falls from the open.
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Conclusion:
Because of the strong mean reversion tendencies in the S&P 500, reversal trading strategies work well in the stock market, at least for the time being. You might also want to read about the Turnaround Tuesday trading strategy.
Why is Tuesday specifically highlighted in this trading strategy?
Tuesday is highlighted because it has demonstrated a consistent and strong performance pattern in the S&P 500, making it a potential day for reversal trading.
What are the different components or variations of the Tuesday Reversal Trading Strategy?
The content outlines various tactics based on specific scenarios, including Mondays with a close lower than the previous day, two consecutive down days, up days, and second consecutive up days, all with distinct trading parameters.
How has the Tuesday Reversal Trading Strategy performed historically?
The content provides historical data, including average gains, wins, maximum and minimum values, and the average maximum and minimum values for the next three days for each scenario tested.
What is a Reversal?
A reversal typically refers to a change in direction or a shift in the opposite direction of a previous trend or pattern.