Why is it important to be able to categorize Market Regimes?
And what benefits can we hope to see from doing so?
Price action exhibits different characteristics in different market regimes.
Being able to classify the current market regime, allows us to adjust our trading rules to best suit the regime we’re in.
Thus allowing us to keep our trading edge, regardless of whether the market is trending or ranging.
It also allows us to filter our trades based on the current market volatility. Another important consideration when optimizing your trading rules for each market regime.
If we use identical trading rules in each regime, we risk our algorithm losing its valuable edge, with the probabilities moving against us.
However, this technique does require careful consideration of statistical significance to avoid over-fitting, which is also explained in the video.
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Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.