The overnight trading action of the S&P has a decisive edge. Did you know that a lot of the gain of the S&P happens at night? This provides a unique opportunity to build a trading system.
But is that edge still holding up?
The overnight edge of the S&P is something I've written about before. If you're not familiar with it, you can check out the article, "The Overnight Edge."
Here's a quick refresher.
I put together a trading system to test the overnight edge by buying at the current close and closing out the trade at the next day's open. So, our trade is in play during the overnight session. On the flip side, I've also tested holding a trade only during the day by buying at the open and selling at the close. If you want to dive deeper into the details, just head over to the article I mentioned earlier.
S&P Points During Overnight Since 2020
What I want to focus on is what has it been doing recently. So, let's take a look at the results since 2020.
- January 1, 2020 to March 8, 2024
- No slippage or commission cost deducted.
- The symbol used was @ES.D.
So, let's dive in and see what kind of action we can find during the day session. It's always exciting to explore new possibilities and see if we can uncover some profitable patterns. Worst case scenario, we learn a thing or two along the way, right?
S&P Points Gained During Day Since 2020
In contrast to the Overnight equity curve we can see new equity highs being made here. Thus, it looks like S&P gains are happening more often during the day session.
Let's put the results in a table to better compare.
Night | Day | |
|---|---|---|
Net Profit | $19,987 | $56,075 |
Profit Factor | 1.05 | 1.10 |
Total Trades | 851 | 851 |
Avg.Trade Net Profit | $23 | $66 |
Max Drawdown | $50,250 | $38,163 |
NP vs. DD | 0.4 | 1.5 |
Let's add a 200-bar simple moving average to act as a regime filter. We'll take long trades only when price is above the 200-bar simple moving average.
Night | Day | Night W/Regime | Day W/Regime | |
|---|---|---|---|---|
Net Profit | $19,987 | $56,075 | $31,850 | $34,937 |
Profit Factor | 1.05 | 1.10 | 1.14 | 1.11 |
Total Trades | 851 | 851 | 602 | 602 |
Avg.Trade Net Profit | $23 | $66 | $53 | $58 |
Max Drawdown | $50,250 | $38,163 | $33,313 | $23,775 |
NP vs. DD | 0.4 | 1.5 | .9 | 1.4 |
Adding the regime filter did help the Night Session but it hurt the Day Session. Interesting! For the Day session we reduce the average profit per trade and the total net profit. On the other hand, with the night session we see nice improvements with the metrics.
Here's the kicker, though: when we've got the regime filter in play, the Day and Night sessions start looking like twins! They're pumping out similar results in terms of net profit and average profit per trade.
But if we had to pick a winner, the Day session takes the crown when looking at the risk-adjusted return (NPDD 1.4).
What About Shorting?
I went and tested shorting as well. But that does not work well. Shorting the S&P is a difficult. It can be done, but it's more work. The S&P has a clear up side bias over all.
What About Other Markets?
Alright, so I decided to do a little digging into the other major stock index markets (EMD, NQ, and YM) to see if they were in on this whole "overnight edge" thing. And guess what? They're all singing the same tune!
It's like December 2021 was the moment the market decided to flip the script. So, it looks like we've got a brand-new market behavior on our hands starting from December 2021. It's like the market went through a major makeover.
Now, since we're dealing with this fresh new market vibe, let's zero in on the data from 2022 to the present. I know it's not a ton of data to work with, but hey, sometimes you gotta make lemonade with the lemons you've got, right?
So, let's put on our detective hats. Who knows what kind of juicy trades we might uncover in this new market landscape? It's all about adapting and finding those hidden gems that everyone else might be overlooking.
Searching For Positive Return in The New Market
I'm going to use TradeStation's optimization feature to test several different possible scenarios.
- I'm going to test going long in the day or night sessions
- I'm going to test going short in the day or night sessions
- I'm going to test the impact of a regime filter
- I'm going to test EMD, YM, NQ and ES
EMD: Short, Night Session, With Regime Filter
Below is the equity curve trading EMD on the short side during the night session with a regime filter. This looks surprising strong.
NQ: Long, Day Session, No Regime Filter
Below is the equity curve trading NQ on the long side during the day session with no regime filter.
YM: Long, Day Session, No Regime Filter
Below is the equity curve trading YM on the long side during the day session with no regime filter.
ES: Long, Day Session, No Regime Filter
Below is the equity curve trading ES on the long side during the day session with no regime filter.
Summary
Well, well, well, it looks like the overnight edge has left the building, folks! It's like it was the life of the party for a while, but now it's decided to call it a night and head home.
Sure, it could come back, rested, and ready to make us some money again in the future. And let's be real, just because the overnight edge isn't as strong as it used to be doesn't mean you can't still make some cash while the rest of the world is snoozing. But hey, you might have to put on your thinking cap and get a little creative to squeeze out those profits.
What Can I Do With This Info?
The above equity curves are not trading systems. They are market studies to help point us in the right direction. They're more like our trusty market compasses, pointing us in the right direction and giving us some clues about where we might want to focus our trading system-building efforts.
So, what's the verdict? Well, for most of the stock index markets (we're looking at you, S&P, NQ, and YM), it seems like the smart money is on building trading systems that take advantage of that sweet, sweet long side bias during the day. Nothing really new here.
But wait, there's always an exception to the rule, right? In this case, it's our buddy EMD. Turns out, EMD has been showing off its contrarian side, with the strongest bias being on the short side during those overnight sessions. So, if you're feeling brave and want to build a shorting system for EMD, you'll need to be prepared to hold your trade through the night.
But hey, don't just take my word for it. This is where you get to shine, my friend! Take all this juicy info and run with it. Start putting together some trading ideas, test them out, and see what sticks.
Remember, not every idea is going to be a winner, and that's okay! It's all part of the process. The key is to keep at it, keep refining your strategies, and keep learning from both your successes and your failures.
So, go forth and conquer, my friend!