Day of the week effect In trading: Strategies And Backtest
Day of the week effect In trading. The weekday effect in trading can be a handy trading edge because trading is about exploiting small trading edges in the market. If you work hard and diversify with different markets, time frames, strategies, and market directions, you can develop a decent portfolio of strategies that hopefully give you a smooth equity curve. Can the day of the week help you in diversifying and finding trading edges? What are the returns every week day?
The weekday effect makes a difference in trading – the weekday effect is a great tool to create edges in the market. Depending on the market and asset class, you can develop trading strategies that use daily seasonalities in the stock market. The weekday effect doesn’t work on its own but needs to have additional parameters. For example, the Tuesday turnaround is one of the strategies that works pretty well in the US equity markets.
Today we look at the different weekday effects in the S&P 500, the DAX 40, OMX 30, the Nifty50, and the Hang Seng index. At the end of the article, we link to two old articles that contain strategies that either directly or indirectly use the day of the week.
How we test the weekday effect in the stock market:
The tests in this article are done like this:
- We buy at the close on weekdays 1-5. 1 is Monday and 5 is Friday.
- We exit at the close the next day.
Thus, the performance in the graphs below means that day 1 is the performance of Tuesday because we enter at the close of a Monday and exit at the close of Tuesday. Please keep this in mind when you read the article.
The tests are done from the year 2000 until September 2021.
The weekday effect in the S&P 500
Let’s start with the most important index in the world: the S&P 500. The table below shows total profits for each day of the week:
Weekday 1 (from Monday to Tuesday) is best and has an average of 0.12%. Thus, Tuesdays are the best day of the week. This is the reason for the success of Turnaround Tuesday.
However, we can clearly see the win ratio is pretty similar despite different returns.
Which day of the week is best to buy stock?
Based on the table above, the best day of the week to buy a stock is Monday. If you buy at the close on Monday and hold until the close Tuesday (the next day), you gain 0.12%.
The weekday effect in the DAX 40
The DAX is one of the most traded stock markets, and the DAX future is a popular trading vehicle. We trade the DAX futures ourselves, and we plan to send out one or several Trading Edges in the future based on this contract:
The table below shows how the different weekdays have performed in the DAX-30:
Weekday one is best and the worst day is from Wednesday’s close to Thursday’s close.
The weekday effect in the NIFTY 50
The Nifty 50 index is the benchmark of the 50 largest Indian companies on the National Stock Exchange. India has thousands of listed companies, and trading and investing are growing in popularity.
The performance per day is like this:
Unlike the S&P and the Dax, Nifty 50 is positive for all days of the week and Wednesday is the best d