Intraday Momentum Trading Strategy In Crude Oil

For decades, traders have used momentum strategies, the idea that past winners keep winning, to find success in equity, currency, and commodity markets. While most research focuses on long-term trends over months or years, a groundbreaking study by Wen et al. (2019) called Intraday Momentum and Return Predictability: Evidence from the Crude Oil Market reveals a powerful phenomenon happening within a single trading day:

Intraday momentum trading strategy in the crude oil market.

Related reading: –WTI Crude Oil Trading

The Discovery: The First 30 Minutes Predict the Last 30

By analyzing high-frequency data from the United States Oil Fund (USO) between 2006 and 2018, researchers discovered that the first half-hour of trading (9:30–10:00 a.m. EST) significantly predicts the last half-hour of the day (3:30–4:00 p.m. EST).

Essentially, if the oil market performs well in its opening minutes, it is statistically likely to finish the day on a high note. This finding is robust for both in-sample and out-of-sample data, providing a reliable signal for high-frequency traders.

Why Crude Oil is Different from the Stock Market

While intraday momentum exists in stocks, the oil market behaves uniquely. In the U.S. equity market, both the first and the second-to-last half-hour returns help predict the end-of-day result. However, the sources show that in the crude oil market, the second-to-last half-hour has no predictive power.

This suggests that oil traders need a specialized approach that differs from traditional stock trading strategies.

When Does Intraday Momentum Work Best?

The strength of this predictability isn’t constant; it fluctuates based on market conditions. The study found that momentum is significantly stronger during:

• Market Crises: Predictability was nearly six times stronger during oil market and global financial crises compared to stable periods.
• High Volatility and Volume: On days with large price swings or heavy trading activity, the “opening signal” becomes much clearer.
• Overnight News Jumps: The momentum is most powerful on days following significant overnight news, especially positive news.
• The “Market Timing” Strategy: Outperforming Buy-and-Hold

To test the economic value of this discovery, the researchers developed a market timing strategy. The rules are simple:

• Observe the return in the first half-hour (1).
• Take a position: If 1 is positive, go long; if 1​ is negative, go short.
• Exit: Close the position at the very end of the trading day.

This strategy generated an annualized average return of 1.85%, significantly outperforming the “always-long” strategy (0.76%) and the traditional “buy-and-hold” strategy, which actually saw a loss of 17.89% over the same period. Furthermore, the timing strategy offered a higher Sharpe ratio, indicating better risk-adjusted returns.

The Science Behind the Trend: Why Does This Happen?

Researchers point to two primary economic drivers for this intraday pattern:

• Infrequent Portfolio Rebalancing: Some investors, hampered by “slow-moving capital,” delay their trading orders until near the market close, following the same direction as the morning’s moves.
• Late-Informed Investors: Not everyone processes news at the same speed. “Late-informed” investors may take hours to digest overnight information, eventually entering the market during the highly liquid final half-hour, which reinforces the initial price direction.

Conclusion for Traders

The crude oil market offers a predictable window of opportunity for those who know where to look. By paying close attention to the first 30 minutes of the trading day, investors can gain a statistically backed advantage in predicting the final 30 minutes, especially during times of high volatility and crisis.

Analogy for Understanding: Think of the trading day like a long-distance race. In the oil market, the “first lap” (the first 30 minutes) often acts like a pacesetter. If the lead runner starts with an aggressive, confident burst, the momentum tends to carry through to a strong finish in the final lap, as the rest of the field (the late-informed traders) eventually follows that same path.