Volatile Regime March 8 2020

indicators market regime sqn Feb 15, 2021

Last week I wrote about the Bull Volatile regime. As I always like to remind people the way that I categorize the markets is using a LAGGING indicator, the SQN (System Quality Number). The SQN is similar to the way a calendar works, it won’t tell you the temperature exactly every single day, but you have a general idea of if it will be cold, hot, rain, snow, dry, long or short hours of sunlight. 


That is if you are in Buffalo, New York in January, you are most likely to have cold, perhaps snow and more importantly you’ll know the tools you need to have handy for that month. Flip flops and a tank top are not to be considered, where as you wouldn’t even think of not grabbing your coat, wearing a sweater and likely your boots and gloves. 


The SQN is the same, it helps traders by giving you the general characteristics of the market regimes.


There are two parts to it, first the trend, Bullish, Bearish or Neutral. 


Being a lagging indicator, this part of it is not going to flip from bullish to bearish too quickly, or there has to be a very jarring move to do so. This also gives us insight into how the previous regime will remain persistent with what has worked so well for them most recently. 


In our current environment, no matter how violent the move has been down in equities, there are a lot of people who have been riding this bull trend and a lot of people who have been greatly rewarded for buying every dip or at the very least, not panic selling and holding on through the good and bad times. 


Also don’t forget most money in the markets is passively managed and every month people contribute to 401k, IRA’s and Wealthfront or whatever, because they simply can’t (and shouldn’t) be bothered with the day to day, week to week girations of the markets. They should be 100% focused on building their businesses, products or futures instead of trying to out think the markets.


A quick side note, If you can’t make $5,000 per month (insert any amount here) trading, and you can make $5,000 a month working for someone else you should reconsider trading full time, and spending an hour every evening after work studying, backtesting, building or learning about a trading strategy and get there eventually.


The next component of the SQN categorization is the volatility part. There are three, Neutral, Quiet and Volatile.


Again, each component has it’s own characteristics, but generally they are based on the size of the day to day moves. 


Neutral is slightly positive one day and slightly negative the next day. 


Quiet is directional with slight moves in the same direction consecutively.


Volatile is less directional and very large moves each day. 


Matching the trend with the volatility gives you an idea of what to look for when considering what strategy to deploy in that trading environment. 


For example in a bull quiet regime, the market goes higher day after day, any little sell off is bought so you generally want to look for long only strategies and consider adding to your longs for any reason.


Where as in a bull volatile strategy, the dominant characteristic of the bull volatile market regime is volatility, not bullishness. The bull part gets a little confusing, but recall this lagging indicator is telling us a lot about where we just came from. The bullish nature of bull volatile means that recency bias is strong, so the buy the dip crowd is going to be willing and able to buy the dips. 


Another big characteristic of bull volatile is that this regime is REQUIRED to get a long term market top. So the sellers are there in force as well, either profit takers or people are rotating to better priced assets.


With that in mind, if an asset class, market, or sector has a steep selloff but isn’t in a Bull Volatile regime on the daily, it hasn’t topped yet. 


One note, VIX and FX don’t play by the SQN rules as they have different influences behind them. 


The last little bit to tie these all together, Bull volatile and bear volatile are NOT the opposite. Bull quiet and bear quiet are not opposites.


The strategy you use in Bull quiet won’t work in an opposite manner in bear quiet.


You can’t be lazy here and simply sell every bounce in a bear quiet regime, because the opposite works in a bull quiet. You will get steam rolled if you do. 


Currently we are in a Volatile market regime on nearly every asset class. 


Notice I didn’t categorize Bull or Bear...


What should we be looking to do or see in a volatile regime?


Substantially smaller position size, which your position sizing algorithm should have adjusted to already, to the point that there might be a lot of assets that you simply can’t trade because the ranges are too wide. 


Very decisive bottoms that have face ripping rallies only to be met with a violent wave of negative news, headline risk, and getting smashed lower


Very decisive reversals lower that get met with positive headlines that smash bears into the ground


Over and over and over


Until we have the world’s best sell setup fail and continue are we out of the woods. 


This level of energy and emotion that the market has seen will need to be met with an equal amount of lethargy, that will happen, which will be met with huge volatility, followed by lethargy, volatility and so on until a price level has been tested enough times to find more buyers than sellers.


Not one to call a bottom, I simply trade what the market gives me. 




There are a number of fantastic ways to categorize market regimes and apply a corresponding strategy to them, for example. 


Using ATR as an indicator of strong easily managed trends or volatility. 


FVBO/VBO strategy categorizes mean reversion or trending strategies. 


SQN indicator categorizes volatility and trend. 


Regardless of whether you use my insights on categorizing market regimes, your own insights or none at all there are a few key tactics that you can employ to keep yourself consistent in the markets. 


Using the correct entry order to pull you into a trade and skipping losing trades

Using the correct profit taking strategies for the market type

Using the correct stop placement strategies for the market type

Using the correct position sizing methods


If you focus on those then even if you have a negative expectancy strategy, you will at least be able to not lose as much as you would otherwise so that you can survive until you eventually get a positive expectancy strategy. 


If you don’t know how to do any of that, then get my Profitable Trading Blueprint course, it’s the best way to go from a struggling trader to becoming consistently profitable, and it’s under 50 bucks. 


We got some new things we are getting ready to launch soon!


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