Market Regimes: The Algohubb Approach to Adaptive Trading
June 24, 2024
CREATED BY
MICHAŁ ZAREMBA
The concept of "Market Regime" can be compared to the weather conditions. We dress differently on a hot day than on a snowy evening. The same can be true for strategies.
The concept of "Market Regime" can be compared to the weather conditions. We dress differently on a hot day than on a snowy evening. The same can be true for strategies. If there are market conditions in which strategies perform well, we allow them to trade without obstacles. However, if unfavorable market conditions arise, strategies should automatically stop trading in anticipation of improving conditions.
As algorithmic traders, we have fantastic tools to discover, backtest, and enable/disable a particular strategy or trades when unfavorable conditions arise. These disabling conditions are "simply" additional filters.
Within the "Market Regime," several main phases can be distinguished:
Bull Market: This is a period in which asset prices are rising, and investors are optimistic about the market prospects. Growth and positive sentiment dominate during this period.
Bear Market: In contrast to a bull market, a bear market is characterized by declining asset prices. Investors are cautious, and pessimistic sentiment prevails; they sometimes sell in panic, which usually makes for a volatile market.
Sideways Market: In this market phase, asset prices remain relatively stable. Price movements are limited, which may indicate a lack of clear dominance by bulls or bears.
Volatility Expansion: In this phase, price volatility increases, leading to sudden and sharp market movements. It is associated with uncertainty and can lead to increased risk.
Volatility Contraction: In this phase, prices don't change as much. It shows the market is more stable. This happens when the market is calm, but the number of opportunities also decreases.
At Algohubb, we test every strategy in the following dimensions:
Market direction (Bull/Bear), using mostly Moving Averages.
Volatility - we apply three levels of volatility, examining current conditions compared to historical conditions (V1, V2, V3).
Seasonality - we analyze and sometimes disable unfavorable periods of the year for a given instrument or strategy.
We conduct the above research most often for a specific asset and concurrently for the index in the case of stocks.
Based on the results, we introduce potential filters to the strategies so that they do not trade or trade less in regimes where they do not perform well.
Interestingly, contrary to popular belief, many strategies perform well in multiple market regimes. We have plenty of LONG strategies that perform well also in Bear Markets. However, this requires an individual assessment of each strategy and the implementation of potential filters.
BEST STRATEGIES
R2 Turbo Strategy
The R2 Turbo strategy draws inspiration from Larry Connors' experiences. While it is based on the Relative Strength Index (RSI) indicator, it includes a specific way of using this indicator and filters that enhance its effectiveness. It is a trend reversal strategy that waits for a specific pullback in an uptrend.
Week Explorer Strategy
For last 40 years, the best day of the week on the US stock market has been Tuesday. The next day with the highest return is Wednesday. We present a strategy that skillfully exploits this market behavior by opening positions only on Mondays and cashing in profits in almost 70% of cases over the following days.
●
KO Christmas Rally Strategy
The seasonal holiday pattern on Coca-Cola is one fantastic example of how seasons affect stocks. The pattern has a logical justification, which is the association of the brand with holidays built over decades. This consequently influenced consumer and investor behavior before this period.
