How We Find The Ideal Trading Strategy For Different Market Regimes

Knowing how to trade in different Market Regimes is just as important, if not more so, than what to trade. So what is a Market Regime?

A Market Regime is a quantified method of organizing the characteristics of different trading environments. We have five:

  • Bull Volatile
  • Bull Quiet
  • Neutral
  • Bear Quiet
  • Bear Volatile

Each regime is a measurement of direction of travel of the underlying asset, Bullish, Bearish or Neutral.

And further organized by Volatile or Quiet.

This is measured with a tool called the System Quality Number (SQN) you can view a video about it here. The SQN measures the average % change from close to close of the previous 100 days and then square roots it. This is how we quantify bullish or bearish, if the change is positive on average for the past 100 trading days, that’s bullish and likewise bearish if negative. Then as the % change increases it becomes more volatile and decreases that’s less volatile. A nice quantified methodology to measure.

This methodology is trailing, so the SQN is a trailing indicator, and that’s important to note. The SQN isn’t there to be a holy grail super classified highly fragile high win rate indicator that will tell you when to buy the next 24% up move or to short a market meltdown.

Rather it’s more like a calendar. If you know that it’s January and you are in Montana, you are more likely to need a heavy coat, boots, hat, gloves and you can pretty much be guaranteed you won’t need a tank top and flip flops.

The SQN is similar because now we can quantitatively recognize the “season” we are in. Like a Calendar would suggest it’s winter and you know you are in Montana, the SQN is saying we are in Bear Volatile regime so let’s get the appropriate tools (attire in this analogy).

Let’s jump in to this weeks action.

SQN Indicator on daily S&P500 Chart

Looking at the S&P 500 index on April 6, 2020, this weeks market action is characteristic of the transition between Bear Volatile and Bear Quiet regimes. It gets tricky in here as optimism starts to kick in as we rally from the depths of hell back to where we are now.

Everything you need to bring your trading to the next level.

If you are interested in this stuff, Have a look at what we have to offer. 

And think about joining us in the Lab, we work on these projects every day together

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