SQN - Market Regimes Strategy - The Prop Trader

6/7/23, 12:11 AM SQN & MARKET REGIMES STRATEGY | The Prop Trader
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MARKET REGIMES
STRATEGY
MARKET REGIMES
Knowing how to trade in different Market Regimes is just as important, if
not more so, than what to trade. So what is a Market Regime?
A Market Regime is a quantified method of organizing the characteristics
of different trading environments. We have five:
Bull Volatile (BullV) – price likely to top and reverse
Bull Quiet (BullQ) – price likely to move higher
Neutral (N) / Sideways – price likely to revert to the mean
Bear Quiet (BearQ) – price likely to move lower
Bear Volatile (BearV) – price likely to bottom and reverse
Each regime is a measurement of the direction of travel of the underlying
asset, Bullish, Bearish, or Neutral. And further organized by Volatile or
Quiet.
This is measured with a tool called the System Quality Number (SQN) that
was developed by Van Tharp. The SQN measures the average % change
from close to close to the previous 100 days and then square roots it.
https://theproptrader.co/2021/09/27/sqn-market-regime/ 1/6
This is how we quantify bullish or bearish, if the change is positive on

average for the past 100 trading days, that’s bullish and likewise bearish if
negative. Then as the % change increases, it becomes more volatile and
decreases that’s less volatile. A nice quantified methodology to measure.
This methodology is trailing, so the SQN is a trailing indicator, and that’s
important to note. The SQN isn’t there to be a holy grail super classified
highly fragile high win rate indicator that will tell you when to buy the next
24% up move or to short a market meltdown.
Rather it’s more like a calendar. If you know that it’s January and you are in
Montana, you are more likely to need a heavy coat, boots, hat, gloves and
you can pretty much be guaranteed you won’t need a tank top and flip
flops.
The SQN is similar because now we can quantitatively recognize the
“season” we are in. Like a Calendar would suggest it’s winter and you know
you are in Montana, the SQN is saying we are in Bear Volatile regime so
let’s get the appropriate tools (attire in this analogy).
EXPLAINING THE REGIMES
The main characteristics of each regime.
Bear Volatile: This regime is observed at, and near the relative bottom of
the correction both before and after. In this state, the market is in need of
rescue, its core temperature needs to be raised externally, as it cannot
accomplish this itself. It is in a hypothermic state, and confidence of a
recovery in the short term along with sentiment is low/bearish.
Governments will come out of the woodwork to attempt to establish
support over a short timeframe.
Price action is often erratic; if you are to initiate positions, do so with
trailing stops, independent of whatever side of a trade you take.
Favor the short side of the trade.
Bear Quiet: This regime is observed above the relative bottom of a major
correction or long-term downtrend. While not as foreboding as a bear
volatile market, there are several mannerisms to take note of:
Light chop is often observed in this regime; price action often
retests relative highs and lows, attempting to nd support.
Government support is rare in this regime.
fi
Currency plays are often as viable as equities regarding position

initiation.
Favor the long side of the trade, however, be wary regarding
overextension, as mean reversion wins out more often than not.
Neutral: This regime shares similar characteristics as a bear quiet,
however, the chop is often greater in magnitude, and mean reversion is
very prevalent. This is the market to “buy dips and short rips”.
This is by far the best performing market in terms of win rate.
If a trade is largely pro table, take those pro ts!
Mean reversion is your adversary. fi
fi
This regime often can go on for a long time, and sideways
movement will likely be observed.
This is an especially favorable market for a high number of trades to
be placed; currency plays may contain up to 5% risk if conviction is
high.
Bull Quiet: This is where the market is not running in a fashion which is too
cold or too hot. Several distinguishing characteristics can be observed:
Buy the dips and add to positions at 1-2% risk.
This is where the headlines are the most “doomsday-ish”, however,
the market seems to ignore the doom and gloom and continues its
ascension.
Favor the long side of a trade, unless you have strong conviction
otherwise. If the market moves high and volume starts to trade
sideways, the top may be in.
However, more often than not, a dip is just enough to fake out
participants and continue an uptrend.
Bull Volatile: This is when the market runs a bit hot and may develop a
“fever”; fever reducers (by way of corrections) are common. This is when
you must take pro ts; the risk is greater than the reward! Be very risk-
averse here (max risk of 1%, maybe 2% if very con dent).
fi
fi
Remember the doom and gloom headlines of Bull Quiet?
This is where the negative sentiment actually starts to take effect
and could tip the scale to the downside.
It is very important to note that without rst rising into a bull volatile
regime, the top is not in.
fi
Any dips here could kick a bull volatile back into a bull quiet, hence
restarting the ascension process.
WHERE CAN I VIEW SQN DATA?

We’ve developed a custom indicator for TradingView that visually shows
the current market regime beneath the chart:
Bull Volatile – Blue

Bull Quiet – Green
Sideways – Yellow
Bear Quiet – Red
Bear Volatile – Maroon
SQN SUMMARY
1 / 1
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APPENDIX
https://drive.google.com/drive/folders/1iupcYbCdsedmvfuHshXObtjpvI
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6/7/23, 12:11 AM SQN & MARKET REGIMES STRATEGY | The Prop Trader

The Prop Trader <

Sep 27 2021 < https://theproptrader.co/2021/09/27/sqn-

Protected: SQN &

This is how we quantify bullish or bearish, if the change is positive on

Currency plays are often as viable as equities regarding position

WHERE CAN I VIEW SQN DATA?

Bull Volatile – Blue

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The Prop Trader < https://theproptrader.co/>

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