Overnight RSI(2) Strategy
I’m trying to get a better understanding of trading opportunities in the overnight market (i.e. after the close and before the open).
Below is a simple SPY strategy meant to illustrate the uniqueness of the overnight session (but for reasons I’ll talk about afterwards, this one is a nonstarter).
In the graph above I’ve assumed that each day just prior to the close we calculated RSI(2) for SPY (RSI(2) is an oft-used short-term overbought/oversold indicator).
If RSI(2) closed below 20 (oversold), we took a 200% (leveraged) long position in SPY at the close. Between 20 and 80, a 100% long position. And above 80 (overbought), we remained in cash.
One small quirk: if the market was in a downtrend, as defined by the 50-day moving average closing below the 200-day, we halved the position.
This is an overnight-only strategy, so all positions were sold at the open. I’m being (unrealistically) generous and assuming no transaction costs, slippage, or margin costs.
Numbers for the number lovers…
There’s clearly something special about the overnight session.
As we’ve talked about ad infinitum on the blog, swing trading with RSI(2) has been a killer strategy for most of the market’s history, but performance has been middling for the last few years as that low hanging fruit was traded out of the market.
But as we’ve also talked about, the daytime and overnight sessions are two entirely different animals and it would seem that RSI(2) still plays at night.
The problem with this particularly strategy is that, because the overnight market isn’t particularly volatile, there isn’t much meat in the daily returns. Returns may be consistent, but they’re too small to reliably overcome trading frictions.
In the simple test above, average daily returns (when invested) were 0.0838%, or $8.38 for every $10,000 traded. Trading frictions and margin costs would easily eat half of that.
So this strategy is a nonstarter, but I think it illustrates nicely that traditional indicators respond uniquely when used to trade the overnight session.
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