3 Days Down Overnight Trading Strategy (S&P 500, Nasdaq, Rules, Performance)

3 Days Down Overnight Trading Strategy (S&P 500, Nasdaq, Rules, Performance, Video)

Here is a simple mean reversion twist in SPY that holds the S&P 500 just one day (from the close to the next day’s open or close). It’s an overnight trading strategy, the lowest-hanging fruit in the stock market (?).

This article was initially published in 2013, and it’s about time we updated it. We thus have plenty of out-of-sample data.

The 3-day down overnight trading strategy

In plain English, the trading rules of the strategy reads like this:

Trading Rules

[am4show have=’p2;p3;p58;p59;p130;p138;’ user_error=’Premium Post Access’ guest_error=’Premium Posts’]

  1. SPY must be down three days in a row (from close to close).
  2. Entry on close on the 3rd down day.
  3. Exit the next day open.

[/am4show]

Here is the equity curve from 1993 for SPY, which tracks S&P 500, until today (backtest done in Amibroker):

There are 661 trades, and the average gain per trade is 0.13%. This might not sound much, but in a liquid asset like SPY, this might be tradeable even though slippage and commissions are not included in the backtest. Please read our article about realistic slippage and commissions for liquid ETFs.

The win rate is 65%, and max drawdown is 8%.

Let’s change the rules and exit on the close instead of the open: