Regime Detection
Identifying and adapting to different market states (trending vs mean-reverting, risk-on vs risk-off).
Definition
Regime detection aims to classify the current market state (e.g. trending, mean-reverting, high vol, risk-off) and optionally switch or weight strategies accordingly.
The core move: classify the current market state, then run or size each strategy only in the regime where it works, mean-reversion in choppy markets, trend-following in trending ones.
Why it matters
- Many strategies work in one regime and fail in another (e.g. mean reversion in trends).
- Adapting or reducing exposure in bad regimes can improve risk-adjusted returns.
Common approaches
- Vol regime (high vs low vol), trend strength (ADX, moving average slope), correlation regime, macro indicators.
- Often used as a filter: only run strategy X when regime = Y.
Common mistakes
- Regime model itself overfitted.
- Lag in detection (regime identified after the move).
- Over-relying on one regime indicator.
The killer is lag: regimes are usually identified only after the move has happened, so the switch arrives too late to help. Guard against an overfitted regime model that fits the past but mislabels the present.
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