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.
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.