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Subject: Things that go bump in the night  Date: 12/12/2012 4:53 PM  
Author: tedthedog  Number: 240526 of 270811  
I've posted a sort of fun analysis of day trading versus night trading for gold and for SPY at this link: http://dl.dropbox.com/u/52242280/DayTradeNightTrade/DayTrade... Click on the above link for the version with graphics. # Only come here if the above link is broken. If the link above is working click on it and ignore the following. Below is the text of the link, including statistics, but w/o any graphics: INTRODUCTION: Consider two (very active) trading strategies; (1) an intraday strategy: buyopen/sellclose (2) an overnight strategy: buyclose/sellopen Questions: (a) Is nighttrading better than daytrading? (b) Are more gains made at night (overnight) than in the day (intraday)? Disclaimers: I saw some references to the intraday versus overnight effect on the web and decided to investigate. Please note that I am not suggesting that anyone try to trade any strategy discussed below. Googling "intraday versus overnight", or similar, brings up a number of links referencing this effect in gold, equities, and currency trading. Here's one that discusses SPY: http://marketsci.wordpress.com/2010/09/30/overnightvsdayti... Here's one for GDX: <A http://www.optionetics.com/marketdata/article.aspx?aid=24606... Here's one from some gold&silver options newsletter company who seem to take it seriously (more on that later): http://www.zerohedge.com/news/overnightlongintradayshortg... ANALYSIS: I programmed up some analysis in R, borrowing liberally from <A href="http://ennlightenment.com/2012/12/lookingatgoldstockintr... Here are some plots describing the intraday versus overnight strategy, and buy&hold. First plot: SPY cumulative returns for intraday, overnight, and buy&hold (percent of initial investment at given date) Second plot: SPY overnight strategy 12 month rolling CAGR (compound annual growth rate over past 12 months, percentage) Third plot: SPY overnight strategy drawdowns (drawdowns, percentage) No friction. <IMG src=SPY.overnightplots.gif alt=SPY.overnightplots.gif> Here are some associated statistics: CAGR.overnight Annualized Return 8.68% MaxDrawdown.overnight 34.76% CAGR.intraday Annualized Return 2.37% CAGR.buy&hold Annualized Return 6.1% CONCLUSION: For SPY there's a moderate edge to nighttrading over daytrading and over buy&hold. More interesting is this general observation: Bull markets tend to run in the night, not in the day, i.e. the gains of SPY tend to be made overnight (green curve, top plot). Here's a similar analysis for gold, GDX (no friction): First plot: GDX cumulative returns for intraday, overnight, and buy&hold (percent of initial investment at given date) Second plot: GDX overnight strategy 12 month rolling CAGR (compound annual growth rate over past 12 months, percentage) Third plot: GDX overnight strategy drawdowns (drawdowns, percentage) No friction. <IMG src=GDX.overnightplots.gif alt=GDX.overnightplots.gif> Here are some associated statistics: CAGR.overnight Annualized Return 56.45% MaxDrawdown.overnight 21.09% CAGR.intraday Annualized Return 34.11% CAGR.buy&hold Annualized Return 3.07% CONCLUSION: For GDX (gold) there's a huge edge to nighttrading over daytrading and over buy&hold. Again, bull markets tend to run in the night, not in the day. If the effect is real, why isn't it traded away? One answer may be "friction". A little googling suggests that 0.1% might be a reasonable guess at bid/ask spread for quite liquid ETF's (may be on the low side). I applied the spread to the open and the close data, i.e. each daily/nightly return was reduced by a factor of (10.001)*(10.001)=0.998 For the daily/nightly strategies this gets compounded daily/nightly. For buy&hold the 0.998 was applied two times, once at the open and once at the close. If someone has a better number, or better way to model it, I'd be happy to use it. But results will presumably be pretty sensitive to the spread if the percentage lost to bid/ask spread is somewhere near the daily percentage gained. Back to SPY with friction. Here are some plots describing the intraday versus overnight strategy, and buy&hold. First plot: SPY cumulative returns for intraday, overnight, and buy&hold (percent of initial investment at given date) Second plot: SPY overnight strategy 12 month rolling CAGR (compound annual growth rate over past 12 months, percentage) Third plot: SPY overnight strategy drawdowns (drawdowns, percentage) With 0.1% bid/ask spread. <IMG src=spy.withfriction.gif alt=spy.withfriction.gif> Here are some associated statistics: CAGR.overnight Annualized Return 34.35% MaxDrawdown.overnight 99.97% CAGR.intraday Annualized Return 41.02% CAGR.buy&hold Annualized Return 6.1% CONCLUSION: Bid/ask spread of 0.1% kills any gains of the nighttrading strategy for SPY. Back to GDX with friction. Here are some plots describing the intraday versus overnight strategy, and buy&hold. First plot: GDX cumulative returns for intraday, overnight, and buy&hold (percent of initial investment at given date) Second plot: GDX overnight strategy 12 month rolling CAGR (compound annual growth rate over past 12 months, percentage) Third plot: GSZ overnight strategy drawdowns (drawdowns, percentage) With 0.1% bid/ask spread. <IMG src=gdx.withfriction.gif alt=gdx.withfriction.gif> Here are some associated statistics: CAGR.overnight Annualized Return 5.51% MaxDrawdown.overnight 52.61% CAGR.intraday Annualized Return 60.21% CAGR.buy&hold Annualized Return 3.07% CONCLUSION: Bid/ask spread of 0.1% kills any gains of the nighttrading strategy for GDX (although there are positive rolling CAGRS during the recent financial meltdown). Parting shot: Considering the fricitionless results above again, the top graph in the group of three suggests an obvious short strategy: Short the day, long the night. This really amps up the returns if there's no friction. But it dies when implement a 0.1% bid/ask spread. Could there be some variation of the above that might work? Possibly, but it seems pretty sensitive to assumptions of the backtest. One would have to be pretty confident (or foolish?) to trade any significant funds based on backtested results of variations of this strategy. Perhaps the most interesting thing is simply the observation that gains tend to be made in the night, not in the day. <HR> I borrowed a lot of the R code to produce the above analysis from http://ennlightenment.com/2012/12/lookingatgoldstockintr... (R is open source). My hack of it is "DayNightTrade.R". 

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