Traders will always try to make the profit with the least involvement of time. One of the ways is in an overnight trading strategy wherein traders can make most of an overnight price move as they are trying to accumulate the intraday move that occurs once the market closes and opening the next trading day. But how do you know whether such strategies will bring steady profits and finally turn out to be lucrative in the long run? Is really very simple overnight trading strategy applied to SPY-a tracker ETF of the S&P 500, in fact a relevant trading strategy, which brings huge profits while keeping the risk to its lowest?
SPY, an ETF tracking S&P 500 index. We’ll share with you rules for trading, test a strategy backward, and give you insight into how the strategy would perform in the past. We’ll also present two ways of improving the performance of the strategy by changing exit conditions and those associated with the risk involved.
This article demonstrates how to implement overnight strategy trading in SPY-a possibility of getting a consistent return-and how to make necessary adjustments to calibrate the risk/reward profile. Armed with all these rules, let’s see how they performed backtested.
What is an Overnight Trading Strategy?
Overnight trading strategy: The overnight trade is a position that runs from the closure of one’s market for a day to the opening of the same market the following day. In thought, such strategy capitalizes on any change in price that occurred from earnings announcements, macroeconomic data, and shift in the prevailing market sentiment throughout the night that may affect trade into the future.
For example, in the case of night trading strategy we would talk about, it is focused solely on one relatively very liquid ETF, which is SPY, it follows the same pattern as the S&P 500 index. Entrance strategies for traders using such a strategy concentrate their attention on entrance configurations in evening positions, becoming fiixe with the opening next morning while they close the position in the 24-hour perspective.
Rules for Overnight Trading SPY
SPY: Intraday overnight trading strategy:
- Buy at the close for today IF it is the third consecutive lower close in a row
- Sell next day at the open.
This approach depends on the idea that within a few days of daily consecutive losses, the market is bound to have some form of short-term bounce or upside reversal. A trader gets into a trade based on three consecutive down days purely to capture short-term price movements by selling at the open of the next day.
Strategy Testing: Overnight Strategy
Let’s get into what has happened historically in the view of this strategy. We have backtested this strategy from 1993 till date and the following is the outcome:
Number of Trades 643
Average Gain per Trade 0.13%
Win Rate 65%
Max Drawdown 8%
Even though these results are in terms of win rate at 65%, the average gain per trade is extremely tiny at 0.13%. Since the trades of SPY are around $400 per share, such a gain can cover some of the slippage and commissions, of course but not going to rock someone’s world who seeks bigger moves. However, consistent small gains overtime may compound and serve as a good steady source of income, provided one is able to manage risks effectively.
Optimization Strategy
Any trading strategy possesses an extremely important property: whether there is still place for improvement of this strategy or not. Can this overnight SPY strategy be optimized toward higher return or reduce its risk in future?
The entry can stay on the overnight but the better exit will be optimized at the end of the subsequent day. Alright, here’s what we get:
- Mean profit per trade: +0.24% (+from 0.13%)
- Win Rate: 60% (-1 point from 65%) –
- Max. Drawdown: 17% (+sizeable jump)
And you see that closing the day instead of opening the day maximizes the average profit per trade to 0.24%, which, of course, is much more bitter for demanding traders greedy for higher profits. Alas, however, a price has to be paid: The win rate drops down to **60%, and the drawdown doubles to 17%. “”.
This is part of the trade-off for every trader: greater potential returns mean more risk. The individual trader will have to decide if this sort of a risk-reward balance will serve him or her well based on his or her risk tolerance and where they are looking in terms of trading goals.
Our Variation of the Overnight Strategy
And for the version we optimized for our trading platform, in practice it returns around 0.35% on average per trade, but with fewer trades in general. A variation of the system uses more sensitive entry and exit conditions and catches much more sizeable price movements in SPY but with fewer trades. That is a consequence of a tradeoff between more sizeable returns and wiser risk management.
But once more, remember that the fewer trades you trade in, the more opportunities you have to make more in each trade but with a bigger chance you might miss an opportunity to make even larger trades; but that is not so bad after all because you will have to change the strategy according to your very own trading style and your risk profile.
Risk Management Issues
No strategy is completely risk-free, and the trades need to be managed very wisely so that no huge losses are incurred. Relevant risks for the overnight SPY strategy will involve:
- Market Gaps It assumes that when you enter, the SPY price will go in the direction this strategy expects but overnight events such as releasing earnings reports, geopolitical happenings or a sudden change in market sentiment can be so extreme they produce gigantic gaps at the market open in favor of, or against your position. That is a risk you need to think quite hard about if you are an overnight trader.
- Slippage and Commissions: Absolutely, very important to remember the trade costs in case of too frequent trading. Slippage and commissions might even negate the meager profits generated in the strategy. This can become quite a substantial sum if one is trading with a small margin of profit on every trade.
- Market Volatility: It really does best when the conditions of the market are relatively less volatile. High market volatility may increase high drawdowns drastically, especially if held overnight and there is unforeseen news that hits the market before it opens.
Conclusion: Is It the Overnight SPY Trading Strategy Worth It?
The SPY overnight trading strategy is a very attractive proposition for any trader who wants to carry a trade into the night, making money in small, regular increments between day close and day open. While the win per trade might look quite attractive, the win ratio and total dependability make the strategy extremely popular for traders who need to keep cranking out returns with regularity.
This can be scaled for traders who will take on more risk to get out by the end of the next day, thus raising the average trade gain per trade to 0.24%, but also raising the.
Overall, the overnight trading strategies detailed here are liquid and implementable as part of a diversified trading strategy. However, you have to modify it to fit your comfort zone between your risk tolerance and your potential reward and based on your preferences or goals or market environment.
If you are interested in trying out this strategy or several other plans, backtest extensively and use appropriate risk management techniques.