“Should I stay or should I go? If I stay there will be trouble, if I go it will be double.” These lyrics from the seminal punk band, The Clash, could easily be tweaked a bit to “Should I hold or should I sell”. This is the primary dilemma facing short term traders particularly near the close each day.
Crazy stuff happens when the market is closed and it’s difficult if not impossible to close your position. For example, the World Trade Center attacks, among many other world events, knocking the market down sharply have occurred outside of regular trading hours. One would reason that based on this fact alone, it’s wise to not hold positions overnight.
That it makes more sense and is safer to close your trade each day then re-open the next day. Well, we decided to test this idea to see how it plays out in the real world of trading. The results were downright shocking. We tested trades on the SPY from 1995 to 2007. One group of traders bought the SPY every day on the close and sold on the open. The second group of traders bought the SPY on the open and held until the close every day.
What was discovered flew in the face of conventional wisdom of closing positions at the close. The overnight group gained 171.40 points over the time frame; while the day trading only group lost a total of 70.88 points! This was despite all the negative things that occurred overnight during those 12 years.Â Remember, the market tripled in value over this time frame, but if you assumed no overnight risk with the SPY, you actually would have lost money.Â
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David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.