Link: Trading by Regimes

Jun 25, 2007: 11:30 PM CST

Dr. Steenbarger recently posted on the topic of “Trading Regimes,” which are ‘relationships which exist between one or more variables and prospective price changes in a trading instrument.’ The relationships tend to be temporary, and one must discover various relationships and be open to the possibility of variance in analysis. Rather, regimes should be analyzed as ‘recent history relationships.’

Regimes are assumed to persist unless the following occurs:

1) There are fundamental, market-breaking news items or economic reports moving markets sharply;
2) Volume and volatility today are meaningfully different from the recent past;
3) Interest rates, currencies, oil, etc. are behaving abnormally relative to their recent past.

Analyzing the market this way provides clues to what may happen, and gives you trading ideas to execute and evaluate.

I particularly enjoyed the final quote:

“Markets play by rules. The rules change. The key is figuring out when fundamental shifts in markets are creating rule changes and when regimes will persist at least one more day. “

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