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

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.

What is Turnaround Tuesday trade?

• Monday Reversal Trading Strategy In The S&P 500 And Nasdaq (Big Move On Mondays – Trend Reversal)
• Monday Overnight Reversal In The S&P 500 (Short strategy)
• Monday/Tuesday trade in Nasdaq
• 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 the 19th of October, 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:

This simple trading strategy looks pretty good:

• Number of trades: 163
• Average gain per trade: 0.7%
• CAGR is 3.9%
• Exposure/time in the market: 2.25%
• Win ratio: 63%
• Average gain per winner: 1.75%
• Average loss per losing trade: -1.05%

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: 247
• Average gain per trade: 0.41%
• CAGR is 3.5%
• Exposure/time in the market: 3.4%
• Win ratio: 60%
• Average gain per winner: 1.23%
• Average loss per losing trade: -0.82%

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 5 trading days later (at the close).

This is the equity curve:

• Number of trades: 442
• Average gain per trade: 0.6%
• CAGR is 8.9%
• Exposure/time in the market: 30%
• Win ratio: 61%
• Average gain per winner: 2.25%
• Average loss per losing trade: -1.94%

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: 453
• Average gain per trade: 0.53%
• CAGR is 8.2%
• Exposure/time in the market: 17%
• Win ratio: 70%
• Average gain per winner: 1.47%
• Average loss per losing trade: -1.67%

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):

We hope to add python code in the future.

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.)