Identifying Market Regimes: A Multi-Indicator Approach
Introduction Financial markets alternate between periods of persistent directional movement and periods of consolidation around a mean. This distinction — between trending and mean-reverting regimes — is among the most consequential facts a trader or portfolio manager must confront, for the optimal strategy in one regime is often the worst in the other. A moving-average crossover that generates steady profits in a trending market will be whipsawed to extinction in a range-bound one; conversely, a mean-reversion strategy that profits from oscillations will suffer catastrophic drawdowns when a trend emerges. ...