July 20


The Overnight Edge

By Jeff Swanson

July 20, 2020

ES, market studies, Migrated, overnight edge, S&P Emini, stock index futures

In this article I’m going to highlight a trading edge that appears in many different instruments and markets including both the futures and equity markets. It’s an edge that has persisted for well over two decades. This edge is a long bias that occurs in the “overnight” session as defined by the U.S. markets. Traders who hold long positions overnight can often be rewarded as substantial upward movement that can occur during this quiet time. Does this edge still hold up? Or is it fading?

Many day traders discuss the advantages of closing out their positions at the end of the day. Such traders are often proud they don’t hold open positions overnight for fear of the market moving strongly against them in the overnight session. This is a valid way to trade, to be sure. There are clear benefits to day traders who close their positions at the end of the day.

For example, if you’re a stock trader you are not exposed to a large gap which opens beyond your stop value thus, you may very well sleep more soundly. I have to admit there is some comfort knowing my account is flat at the end of the day. However, when it comes to market psychology what feels right is not often the best thing to do for your equity. What may appear to be a “safe thing to do” in reality, is more harmful than not.

While this post is by no means a rant against people who close out their positions at the end of the day, it does get me wondering that this fear of holding through the overnight session may be worth investigating. I ask, does the overnight session hold more of a bullish or bearish edge?

Let me ask this question: When do you think the most points are accumulated in the S&P E-mini market, during the day session or during the overnight session? To answer this question I developed two simple strategies.

  1. Day Test: Open trades at market open and close at market close.
  2. Night Test: Open trades and market close, and close trade at market open.

They both use a daily chart and a 200-period simple moving average (SMA) as a market environment filter so trades are only taken when price closes above the SMA. Both systems were executed from January 3, 2006 to July 14, 2020 with no slippage or commission cost deducted.

The Day Session

The first strategy simply buys at the day’s open and closes the position at the end of the day. Thus, we are capturing the points gained or lost during the day session. The equity curve is a sum of the points gained or lost during the day session. Below is the equity curve of this trading system.

Points captured during the day session

The Night Session

The night session strategy is just as simple but it opens a new position at the close of the daily bar. It then closes that position at the open of the next bar. Thus, we are capturing the points gained or lost during the night session. The equity curve is a sum of the points gained or lost during the night session since 2006. Below is the equity curve of this trading system.

Points captured in the overnight session

As you can see there is a clear difference between the night session and the day session. What does this mean to you? There seems to be an edge in exploiting long positions by riding the overnight session. My hypothesis is because so many active traders do not trade the overnight session, the market will often move in such a way as to lock them out from gains. Most people are familiar with the market shakeouts that rattle the faith of bullish participants, thus forcing them to lose their position.

You’ve seen it where the market moves down to take out your stop loss only to reverse in your favor. A painful experience. However, the market does have another subtle trick that messes with your psychology. That trick is making you miss the bull move altogether. Put another way, not only does the market attempt to shakeout weak hands (stopping you out), it also does a fantastic job of making people miss the rally! I think there is some of that going on here.

Recent Performance Of The Overnight Edge

A few years ago the overnight edge appeared to be fading. But when we take a closer look at the past the last few years the edge has been OK but as you can see, it’s been weak over the past four years, the edge seems to be holding up.

Points from overnight session over the past 4 years

For comparison below is the equity curve of points captured during the day sesson.

Points from day session over the past 4 years

The overnight session still may hold a bullish edge. To take advantage of this some system traders devise a trading system to enter long trades in the overnight session or continue to hold trades through the night session that they would otherwise close.

Jeff Swanson

About the author

Jeff has built and traded automated trading systems for the futures markets since 2008. He is the creator of the online courses System Development Master Class and Alpha Compass. Jeff is also the founder of EasyLanguage Mastery - a website and mission to empower the EasyLanguage trader with the proper knowledge and tools to become a profitable trader.

  • Hi Jeff,

    An interesting article!

    I can immediately think of simple applications . . . take something like the Connors RSI(2) strategy – in theory after a signal is received, it should make more sense to enter long positions at the close, but to defer short positions until the following open. That ought to reduce MAE.

    Another interesting and simple study would be whether greater price excursion (either up or down) occurs during the overnight than the cash session (I think I saw this kind of study on the Steenbarger blog years ago, but wouldn’t necessarily be up to date).

    • Hey BlueHorseshoe, those are some good ideas. I’ve used the enter long positions at the close after a Connors RSI(2) strategy and that has done well for me. I’ve not tested the short side. I like the idea about testing the MAE during the overnight session vs the cash session. I’ll look into that one.

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