Algorithmic Trading: Winning Strategies and Their Rationale

CHAPTER 7

Intraday Momentum Strategies

In the preceding chapter we saw that most instruments, be they stocks or futures, exhibit cross-sectional momentum, and often time-series momentum as well. Unfortunately, the time horizon of this momentum behavior tends to be long—typically a month or longer. Long holding periods present two problems: They result in lower Sharpe ratios and backtest statistical significance because of the infrequent independent trading signals, and they suffer from underperformance in the aftermath of financial crises. In this chapter, we describe short-term, intraday momentum strategies that do not suffer these drawbacks.

We previously enumerated four main causes of momentum. We will see that all but one of them also operate at the intraday time frame. (The only exception is the persistence of roll return, since its magnitude and volatility are too small to be relevant intraday.)

There is an additional cause of momentum that is mainly applicable to the short time frame: the triggering of stops. Such triggers often lead to the so-called breakout strategies. We'll see one example that involves an entry at the market open, and another one that involves intraday entry at various support or resistance levels.

Intraday momentum can be triggered by specific events beyond just price actions. These events include corporate news such as earnings announcements or analyst recommendation changes, as well as macro-economic news. That these events generate time series momentum ...