By: Peter Levant, MBA, MSc, Managing Director, Index Research LLC
One of the biggest questions for traders is when to enter a strategy. We looked at some of the main points to consider when it comes to intraday trend-following strategies for stock market indices, such as the S&P 500 and Nasdaq 100. Since most trend-following strategies use a moving average crossover, we started with that. Then we looked at the bars following the cross.
In intraday trend-following strategies using moving average crossovers, the early bars after a crossover often do not have consistently better returns than the later bars, and in some cases may actually have lower risk-adjusted returns. Here’s a breakdown of what empirical evidence and practical trading experience show.
- False Signals Are Common in Early Bars
Immediately after a crossover (for example, 5SMA crosses 20SMA), price action is often choppy. These early bars are highly vulnerable to whipsaws, especially in low volume periods or sideways markets.
- Sustained Trends Often Develop After Some Confirmation
Better intraday returns tend to occur after a trend establishes itself, often 5-30 minutes after the initial crossover. Momentum tends to pick up once volume and volatility increase (for example, after economic news or after the day session market open digestion).
- Time of Day Effects Matter
Early in the trading session (for example, 9:30-10:00 AM EST), volatility is high, but the price path (price direction) can be erratic. Intraday trend-following strategies may perform better mid-morning (10:00-11:30 AM) or early afternoon, when trends are more directional.
- Empirical Evidence from back testing
Back tests on intraday moving average crossovers (For example, 5/20 SMA on 1-minute, 2-minute and 5-minute bars) generally show:
| Price path after Crossover | Typical Characteristics |
| 0–2 bars (early) | High noise, low return, high risk of whipsaw |
| 3–10 bars (middle) | Stronger trends, better average return |
| 11+ bars (late) | Lower return per bar, but may still be profitable with trailing exits |
In other words, the “middle” of the intraday trend often offers the best risk/reward, not the earliest bars.
Why would this be
Moving averages are lagging indicators – by the time they cross, part of the move has already happened. In addition, the crossover point often coincides with short-term exhaustion before a pullback, then a trend continuation. And late trend moves may benefit from momentum or breakout confirmation, which can be stronger than the initial signal.
Conclusion
Don’t expect the first 1-3 bars after a crossover to offer the best entry point.
Consider using filters, such as:
-
- Volume confirmation
- ATR or volatility thresholds
- More specific Time of Day effects
- Higher Time Frame trend alignment (for example, use 15-minute, 60-minute or Daily bars with SMAs or EMAs)
Entering trades during the meat of the trend often yield better results.
No Investment Advice
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