Regime Detection for Practical Traders

Markets do not behave the same way every day. Some weeks, the S&P drifts quietly inside a 20-point range. Other weeks, it swings 80 points in a session and reverses the next day. These are not random fluctuations -- they are regimes. A regime is a sustained statistical state where the market's behavior follows a recognizable pattern: low volatility and trending, high volatility and mean-reverting, or something in between. The practical implication is straightforward. A mean reversion strategy that prints money in a quiet regime will get destroyed in a trending one. A trend-following approach that thrives during directional moves will bleed out from whipsaws when the market is range-bound. Most traders use the same strategy every day regardless of conditions. That is like wearing the same clothes in every season -- it works sometimes, but not because of any skill. Regime detection is the process of identifying which state the market is currently in, so you can match your approach to the conditions. It does not predict direction. It tells you what KIND of day or week you are likely facing, which determines whether your edge is present or absent.

Curistat's Regime Composite (CRC) fuses five distinct models into a single 0-100 score. Each model captures a different dimension of market state, and their combination is more robust than any single measure. Hidden Markov Model (HMM): This statistical model identifies the most probable hidden state given observed price behavior. Think of it as pattern recognition for market personalities -- it detects when the market shifts from "calm and drifting" to "volatile and uncertain" based on transition probabilities learned from a decade of data. Volume-Synchronized Probability of Informed Trading (VPIN): VPIN estimates the balance between informed and uninformed order flow. When informed traders (institutions with an information edge) dominate the flow, VPIN rises. Elevated VPIN preceded the Flash Crash of 2010 and consistently signals periods where large players are repositioning. Bayesian Online Change-Point Detection (BOCD): This algorithm detects structural breaks in real-time. Rather than smoothing over sudden shifts (as moving averages do), BOCD identifies the exact moment when the statistical properties of the data change. It answers the question: did something just fundamentally shift? Hurst Exponent: The Hurst exponent measures whether a time series is trending (H > 0.5), mean-reverting (H < 0.5), or random (H = 0.5). This directly informs strategy selection. A Hurst reading of 0.65 says the market is trending -- momentum strategies have an edge. A reading of 0.35 says the market is reverting -- fade the extremes. Sample Entropy: Entropy measures the complexity and unpredictability of price action. Low entropy means the market is behaving in orderly, predictable patterns. High entropy means chaotic, hard-to-read conditions. Entropy helps distinguish between a quiet market that is tradeable (low entropy, low volatility) and a quiet market that is about to explode (low volatility but rising entropy).

The CRC score runs from 0 to 100 and divides into five bands: 0-20 (Deep Calm): Extremely low volatility, highly mean-reverting conditions. Ranges are tight, trends are absent, and the market drifts without conviction. Scalping and range-fading strategies perform best. Position size can be standard because risk per trade is naturally contained by narrow ranges. 21-40 (Low Volatility): Below-average movement but not suppressed. The market may have a mild directional bias but is unlikely to produce large moves. Mean reversion still has an edge but trend signals begin to appear. This is the most common regime -- roughly 40% of trading days fall here. 41-60 (Transitional): The market is shifting between states. This is the hardest regime to trade because the old pattern is breaking down but the new one has not established itself. BOCD change-point signals are most valuable here. Many experienced traders reduce size during transitional regimes because the edge is ambiguous. 61-80 (Elevated): Volatility is above average, trending behavior dominates, and institutional repositioning is underway. VPIN is typically elevated. Trend-following and breakout strategies have their best win rates in this regime. Stops must be wider to accommodate larger moves. 81-100 (Crisis): Extreme volatility, fear-driven behavior, and gap risk. These readings occur during events like the COVID crash, the 2022 rate shock, or single-day liquidation cascades. Many traders sit out entirely. Those who trade use minimum size with very wide stops. The opportunity is large but so is the risk of being on the wrong side of a 100-point move.

The practical application of regime detection is strategy selection. You do not need five strategies -- you need two or three, and the discipline to deploy the right one for the conditions. In calm regimes (CRC 0-40), the playbook is mean reversion. Look for price at the extremes of the recent range and fade the move. IBS (Internal Bar Strength) and RSI(2) signals have their highest documented win rates in these conditions. Stops can be tight because the expected range is narrow. Targets are modest -- you are collecting small, high-probability wins. In elevated regimes (CRC 61-80), the playbook shifts to trend-following. Breakouts are more likely to follow through. Moving average crossovers have positive expectancy. Stops need to be wider because intraday swings are larger, and trying to scalp in a trending market leads to a series of small losses as you fade a move that keeps going. In transitional regimes (CRC 41-60), the best trade is often no trade. The statistical edge of both mean reversion and trend-following weakens during transitions. Traders who insist on trading every day give back their calm-regime and elevated-regime profits during these ambiguous periods. The CRC score does not tell you what to buy or sell. It tells you which of your strategies has an edge today. That selection -- made before the session opens -- is worth more than any entry signal.

Regime transitions are where the most money is made and lost. The shift from calm to elevated often coincides with an economic event, a geopolitical surprise, or a CTA repositioning event. The shift from elevated back to calm happens when the market digests the new information and institutional flows normalize. The CRC provides early warning of transitions through the BOCD component. Change-point detection flags the moment when the statistical properties of price action diverge from the current regime. This does not mean the transition has completed -- it means one is beginning. The practical response is to reduce position size and widen stops, preparing for the possibility that your current strategy is about to stop working. Historically, regime transitions take 2-5 trading days to complete. During this window, both mean reversion and trend-following strategies show reduced win rates. The traders who handle transitions best are the ones who recognize the ambiguity, reduce exposure, and wait for the new regime to establish itself before committing capital. One pattern worth noting: the transition from deep calm to elevated is often faster and more violent than the reverse. Markets take the stairs up and the elevator down. A CRC that jumps from 15 to 65 in two sessions is signaling a regime shift that demands immediate attention -- strategy rotation, position reduction, or sitting out until the new state stabilizes.