The Turnaround Tuesday Trading Strategy (Setups, Rules, Performance Analysis)

The Turnaround Tuesday Trading Strategy

The Turnaround Tuesday effect happens from the close of Monday’s trading session until (at least) the close of Tuesday’s trading session. The effect is no myth! Let’s do some backtesting to find what seems to work and not work.

This article looks at the Turnaround Tuesday trading strategy. Buying on weakness on a Monday seems like a good trading strategy. The Turnaround Tuesday effect exists, but it improves by adding a filter.

Key takeaways

• The “Turnaround Tuesday” phenomenon refers to the observed tendency of stock markets to reverse their direction on Tuesdays, particularly following a decline on Monday.
• This effect has been analyzed and documented by various market analysts and trading strategists.​
• QuantifiedStrategies.com conducted a study revealing that, historically, Tuesdays have been more likely to produce positive returns, especially after consecutive down days. Please see the provided facts and statistics further down in the article.
• The trading metrics suggest that the strategy capitalizes on the Turnaround Tuesday effect with a relatively high success rate and minimal market exposure.

What is 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, you are likely to get above-average returns in the next few days. Opposite, if Monday is very strong, 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!

Turnaround Tuesday trading strategy number one (trading rules):

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

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.

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%

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.

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%

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 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.

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. 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.

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 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.