What Is A Market Regime?

Market regimes are methods to use a number of characteristics that happen over and over when a market is trading in a different regime. 

You can have directional regimes, like bullish or bearish, you can have volatility regimes like high vol/low vol, you can even have neutral regimes where price of the underlying market stays within a very tight range. 

Correctly identifying a market regime is useful, but knowing the characteristics of the regimes (and how to exploit them for profit) is where the real power is.

Let’s look at a couple of different ways to categorize market regimes.

Macro Economics — this is probably the most quoted and talked about in business news, think interest rates, unemployment, growing GDP, PMI’s, etc.. You will find no shortage of market categorization and predictions from this regime.

Low Volatility/High Volatility/Trending/Mean Reversion — One of my favorite and most useful ways to categorize a market regime. This can be done using indicators like SQN and ATR (which I’ve written about before). These are derived from the actual price direction or the changes in price %, which allows you to compare against other periods to find characteristics.

Fundamentals — Using PE Ratios, growth, management teams performance, sectors, and other traditional financial analysis tools you can decide if a company is undervalued, in a growth phase, close to bankruptcy and many other ideas.

These are abut a few different ways to categorize market regimes, there are many more.

For the purposes of how we trade here at Pollinate we focus on Low/High Volatility and Trending/Mean Reversion using quantitative tools derived from price.

Once we’ve got a tool that we are comfortable with to help us identify and sort the different categories of regimes we can then focus on trying to identify unique characteristics of each category.

Believe it or not there is a LOT of work to be done in this space.

It was suggest to me this week if I’d write a book about Market Regimes, and that’s what I’m going to do.

I will be working with the other members in the Trading Lab, researching, backtesting, and learning about different market regimes and a slew of insights as we write this book.