Education · Long-form
Regime Filters: When Setups Should and Should Not Fire
Foundation taught that a hammer in the middle of nothing is just a hammer. Stage 2 makes the 'middle of nothing' concept mechanical — through trend, volatility, and breadth filters that gate setup activation. This page covers the four regime dimensions and how each modifies setup behaviour.
Trend regime
Binary or trinary classification: trending up, trending down, ranging. Most setups perform very differently across these three regimes. Simple definition: price above 200-day SMA AND 200-day SMA rising over 30 days = uptrend. Below AND falling = downtrend. Otherwise = range. Apply as a hard gate per setup: trend-following setups fire in trends only; mean-reversion setups in ranges only.
Volatility regime
Low / normal / high vol bands. India VIX is the cleanest single measure for index context. For individual stocks, ATR(14)/Close as relative volatility ratio, classified into terciles using 6-month rolling baseline. Effects: trend-following works across all regimes (with size scaling); mean-reversion best in low-to-normal vol; breakout best in low-to-vol-expansion transitions.
Breadth regime
Advance-Decline (AD) line: rising AD with rising market = broad participation, healthy trend. Falling AD with rising market (negative breadth divergence) = narrow leadership, fragile. Stage 2 application: in negative breadth divergence regimes, reduce size on long setups by 50%. Useful for index-level setups; optional for individual stocks.
Macro regime
Risk-on / risk-off classification. India VIX above 6-month average AND USDINR weakening AND bond yields rising = risk-off. Inverse = risk-on. Application: in risk-off regimes, mean-reversion long setups in Indian equities are higher-conviction; trend-following long setups are lower-conviction. Treat as a sizing modifier rather than hard gate.
Composite regime gating
Multi-regime AND-gating: setup fires only when 4+ regime conditions align. Rare but high-conviction. Stage 3+ regime composite is the strongest single-direction filter available before specific-security advisory crosses into regulated territory. Bharath Shiksha curriculum covers regime composites in Stage 3 Module 5.
FAQs
How do I update regime weekly?
5-minute Sunday check: read 200-SMA position and slope on broad index, India VIX level relative to 6-month average, AD line direction over last 10 days. Three numbers; most experienced traders do this in 90 seconds.
Can regime filters be backtested?
Yes — Stage 4 Quantitative covers regime-conditional backtesting. The IS/OOS gap on regime-filtered backtests is typically smaller than on naive backtests, suggesting regime-aware setups are more robust.
What's the cost of false-positive regime classification?
If you misclassify regime, setups fire in wrong contexts and produce sub-expectancy outcomes. The cost depends on how many regime-mismatched setups you take. The discipline of mechanical regime classification keeps the cost bounded.
Are there pure-mean-reversion regimes?
Yes — extended low-volatility ranges. Stock A in 4% range for 60 days = mean-reversion regime. Setup design for that regime is range-traversal entries near boundaries with rejection candles.
How does Stage 6 use regime filters?
Stage 6 (Mastery III) institutional-grade work uses regime filters at the portfolio level — different sleeves of capital allocated to different regimes. Beyond Stage 2-3 application; relevant for AIF Cat III operators.
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Enrol — ₹4,999Bharath Shiksha is an educational publisher. We do not provide investment advice. Curriculum uses anonymised historical examples with at least 30-day data lag; no specific securities are named for buy/sell/hold; no performance claims or return projections.