Turnaround Tuesday Strategy (Backtest, Trading Rules, And Performance)

The Turnaround Tuesday trading strategy is a popular trading concept that targets stocks or indexes that fell sharply on Monday. The idea is simple: after a big drop, prices often rebound on Tuesday. Traders look for strong oversold moves on Monday and enter positions early Tuesday, aiming to capture intraday bounces.

In this article, we will explore the Turnaround Tuesday pattern, including the psychological factors behind its occurrence and its significance for traders and investors.

This article looks at several trading ideas and backtests of the Turnaround Tuesday trading strategy. We will present different ideas for trading this pattern and consider how various instruments, such as stocks and indices, can affect the results. Buying on weakness on a Monday seems like a good trading strategy. The Turnaround Tuesday effect exists, but it improves by adding a filter.

Introduction to Turnaround Tuesdays

The Turnaround Tuesday trading strategy is a well-known concept among traders and investors seeking to capitalize on short-term market reversals. At its core, this trading strategy is built around the turnaround tuesday effect—a tendency for the market to reverse direction on Tuesday following a significant move, particularly a decline, on Monday.

The idea is straightforward: after a weak Monday, when market sentiment is often negative and prices have dropped, there is a higher probability of a rebound or turnaround on Tuesday.

This pattern has been observed and quantified across decades of market data, making it a reliable concept for those looking to make informed trading decisions. By recognizing the potential for a positive change in direction after a significant move down on Monday, traders can position themselves to benefit from the anticipated rebound.

The turnaround Tuesday trading strategy is not just about timing the market; it’s about understanding the psychology of market participants and using that insight to guide strategy and execution. For investors and traders alike, this approach offers a systematic way to seek profits from short-term market inefficiencies that often occur at the start of the week.

Key takeaways

• Turnaround Tuesday Phenomenon Exists: The strategy is based on an observed pattern where markets tend to reverse direction on Tuesday following a down Monday, and this effect has been documented with historical data.
• Profitability on Weak Mondays: Buying after Mondays with significant weakness (e.g., close lower than Friday’s close) and selling Tuesday shows historically positive returns, suggesting a tradable edge when weakness is present.
• Performance Improves With Filters: Backtests show that incorporating additional filters, such as the Intraday Breadth Strength (IBS) below certain thresholds, generally increases success metrics (higher CAGR and win ratios). Proper backtest setup—including correct trading instrument, platform, and parameters—is essential for accurately simulating past performance and ensuring reliable results.
• Holding Longer Can Boost Returns: Variations that hold the trade beyond Tuesday (e.g., several days or until certain technical conditions) tend to show higher annualized returns and win rates in backtests.
• Only Works on Weakness, Not Strength: Reverse strategies that buy strength on Monday (e.g., buying on up Mondays) do not produce favorable outcomes; the effect is primarily tied to buying weakness.

What is the Turnaround Tuesday trade?

We have previously written about potential trading strategies based on the day of the week effect, particularly on Mondays: the stock market has a tendency to change direction and move in the opposite direction of the previous move prior to Tuesdays.

For example, if the market is down on a Monday compared to Friday’s close, you are likely to get above-average returns in the next few days. The strategy often uses Friday’s close as a reference point to determine whether Monday’s performance qualifies as ‘weakness.’ Opposite, if Monday is very strong relative to Friday’s close, the return over the next days is substantially lower compared to a down day.

• 10 free swing strategies that work (backtested buy and sell signals)

The mother of all Turnaround Tuesdays

To give you an example of a Turnaround Tuesday, just look at what happened on the mother of all Turnaround Tuesdays: the Black Monday on the 19th of October 1987.

After a dramatic day on Monday, October 19th, the market rebounded 5.3% on Tuesday and 9.1% on Wednesday!

It’s worth noting that statistical analysis of the Turnaround Tuesday effect often uses data going back to the beginning of 1980 to capture long-term trends.

We test the following strategy and make the following trading rules (from SPY’s inception until today including 0.03% commissions and slippage per trade):

Trading Rules

For this strategy, we use the SPY ETF as the trading instrument. The rules are as follows:

1. Today is Monday.
2. The close must be at least 1% lower than Friday’s close.
3. If one and two are true, then enter at the close.
4. Exit at the close on Tuesday.
5. Trades are executed only on the SPY ETF instrument.
6. Set a stop loss order at a certain percentage (e.g., 2%) below the entry price to limit potential losses.

This simple trading strategy looks pretty good (from SPY’s inception until today):

• Number of trades: 212
• Average gain per trade: 0.3%
• CAGR is 1.8%
• Exposure/time in the market: 2.5%
• Win ratio: 56%
• Average gain per winner: 1.4%
• Average loss per losing trade: -1.1%

Application to Major Indices

The Turnaround Tuesday strategy is particularly effective when applied to major indices such as the S&P 500, NASDAQ, and DAX. These stock indices often reflect broad market sentiment, making them ideal instruments for this trading strategy. Typically, traders monitor the market price and sentiment throughout Monday, looking for signs of weakness – such as a down Monday or negative performance relative to Friday’s close. When these conditions are met, a position is established near the Monday evening close.

Technical analysis plays a crucial role in identifying the right setup for the turnaround Tuesday effect. By analyzing price action and market sentiment, traders can pinpoint when an index is oversold and poised for a rebound. The strategy works by taking advantage of the market’s tendency to reverse after a significant move, with the expectation that prices will recover on Tuesday or even into Wednesday.

This approach is not limited to the S&P 500; it can be adapted to other major indices, allowing traders and investors to diversify their application of the turnaround Tuesday strategy across different markets.

By systematically applying this strategy to major indices, traders can potentially capture short-term profits from predictable market behavior. The key is to remain disciplined, use clear entry and exit rules, and rely on robust analysis to confirm that the conditions for a turnaround are present. This makes the turnaround Tuesday strategy a valuable tool for those seeking to exploit short-term volatility and market inefficiencies at the start of the trading week.

Turnaround Tuesday trading strategy number two:

We test the following strategy:

1. Today is Monday.
2. The close must be lower than the open.
3. The IBS must be below 0.2.
4. If 1-3 are true, then enter at the close.
5. Sell at Tuesday’s close.

When applying this strategy, traders may also look for support areas on price charts to identify potential reversal points, as these levels can indicate where buying interest might halt or reverse a downward move.

This returns the following compounded equity curve in SPY from 1993 until September 2021:

• Number of trades: 270
• Average gain per trade: 0.33%
• CAGR is 2.7%
• Exposure/time in the market: 3.4%
• Win ratio: 57%
• Average gain per winner: 1.2%
• Average loss per losing trade: -0.8%

The return is substantially higher than any other day.

The same strategy as above produces the following profits on the different weekdays (1 is buying the Monday close, 2 is Tuesday’s close, etc.):

As you can see, buying at the close on a Monday is twice as good as buying on the Tuesday close, not to mention the other days, which are even less profitable.

Thus, the Turnaround Tuesday is no myth. Buying weakness on Mondays has turned out to be a profitable strategy for about 30 years. However, it seems to work only on a weak Monday.

Turnaround Tuesday trading strategy number three:

Let’s test by holding longer. We test the following strategy:

1. Today is Monday.
2. The close must be lower than the close on Friday.
3. The IBS must be below 0.5.
4. If 1-3 are true, then enter at the close.
5. Sell 4 trading days later (at the close).

This is the equity curve:

• Number of trades: 495
• Average gain per trade: 0.45%
• CAGR is 6.5%
• Exposure/time in the market: 24%
• Win ratio: 60%
• Average gain per winner: 1.8%
• Average loss per losing trade: -1.7%

These performance metrics are calculated based on a specific starting capital, with total gain, CAGR, and risk/reward ratios all measured relative to the initial capital invested.

Turnaround Tuesday trading strategy number four (trading rules):

1. Today is Monday.
2. The close must be lower than the close on Friday.
3. The IBS must be below 0.5.
4. If 1-3 are true, then enter at the close.
5. We sell when the close is higher than yesterday’s high (meaning the high from the previous trading day, so it’s important to monitor price action and patterns observed yesterday) OR 4 trading days later at the close.

• Number of trades: 495
• Average gain per trade: 0.46%
• CAGR is 7%
• Exposure/time in the market: 17%
• Win ratio: 69%
• Average gain per winner: 1.4%
• Average loss per losing trade: -1.65%

All the backtests are based on “looking forward” because we enter and sell at the close, a price which we don’t know until after the fact. Read here for how to enter and exit positions at the close.

Flipping the Turnaround Tuesday

Let’s flip the strategy:

1. Today is Monday.
2. The close must be higher than the open.
3. The IBS must be above 0.8.
4. If 1-3 are true, then enter at the close.
5. Sell at Tuesday’s close.

These trading ideas are for educational purposes and can be tested or backtested using various platforms to see how they perform on different instruments.

Buying on strength on a Monday is not a good idea:

If you want the Amibroker (AFL) and Tradestation (Easy Language) code for the Turnaround Tuesday trading strategy, you can order it together with all the other code from our free trading strategies (the code is also in plain English) if you become a member.

Conclusion: The Tuesday Turnaround effect

The Turnaround Tuesday is no myth. Our backtests indicate that the Turnaround Tuesday is a potential tradeable strategy that has good risk and reward. However, portfolio composition is crucial: not having the S&P 500 in a portfolio on Tuesdays results in a decrease of the average return from 9.1% to 6.5% when analyzing data going back to 1980, highlighting the importance of including the right instruments to capture the Turnaround Tuesday effect. But as you can see, it only works on weakness. (However, currently, with the crisis in Russia and Ukraine, the stock markets are all about macro and geopolitical risks. Be careful.)

Here you can find all our Trend reversal trading strategies.

FAQ:

What is the Turnaround Tuesday Trading Strategy?

The Turnaround Tuesday Trading Strategy is based on the observed market tendency for reversals in price direction occurring from the close of Monday’s trading session until at least the close of Tuesday’s trading session. The strategy involves specific rules for entering and exiting trades during this period.

What is the psychology behind Turnaround Tuesday?

The psychology behind Turnaround Tuesday combines investor overreaction and a short-term digesting of information: stocks that fall sharply on Monday often trigger panic selling, creating oversold conditions. By Tuesday, investors have had time to process news from the weekend or late last week, reassess value, and adjust their positions, leading to a potential rebound as emotions like fear and regret subside and new information is fully integrated into trading decisions.

Who invented the turnaround Tuesday strategy?

If you’re looking for the trader most credited with turning the observed “Turnaround Tuesday” pattern into an actionable, teachable strategy, it’s Larry Williams. The core idea predates him and has been around as trader folklore for many years. He developed, tweaked, and taught specific versions of it (particularly for stock indices like the S&P 500).

Modern trading videos, backtests, and resources explicitly refer to it as one of “Larry Williams’ simple strategies” or “Larry Williams Turn Around Tuesday strategy,” often involving rules like buying after a weak Monday close (sometimes with added filters like Treasury rallies) and exiting Tuesday’s close. A 2009 trading blog already noted Williams tweaking an earlier version for better reliability.

How Does the Turnaround Tuesday Strategy Work?

There are several variations of the Turnaround Tuesday strategy. One approach involves buying on a weak Monday, where the close is at least 1% lower than Friday’s close, and selling at Tuesday’s close. Another variant incorporates filters like the Intraday Breadth Strength (IBS) to enhance the strategy’s performance.

How can I use Turnaround Tuesday to trade?

The Turnaround Tuesday strategy is a trading approach that exploits the tendency of markets to rebound on Tuesday after a down Monday. Traders buy an index such as an ETF (e.g., SPY) or stocks near Monday’s close, betting that weekend fear-driven selling has subsided, and exit the position on Tuesday or Wednesday. 

How Effective is Buying on Weakness on Mondays?

Buying on weakness on Mondays has proven to be a profitable strategy over the past 30 years. Backtests indicate positive returns, and the strategy seems to work best on Mondays characterized by weakness. Turnaround Tuesday strategy appears to be most effective when applied to weak Mondays.

What is Turnaround Tuesday?

Turnaround Tuesday describes the market pattern where the S&P 500 and other major indices often reverse course on Tuesday after making a significant move the previous Monday.