Markets alternate between trending and ranging regimes. Mean reversion strategies perform well in ranging markets but can suffer significant losses during trends. Regime detection helps identify when conditions favor mean reversion approaches.
The Regime Problem
A stock showing RSI of 20 might seem like a great buying opportunity, but context matters:
- Ranging market: RSI 20 often precedes a bounce
- Downtrending market: RSI 20 might just be a pause before further decline
Regime detection attempts to distinguish these scenarios before entering trades.
Key Regime Indicators
Hurst Exponent
The primary regime classifier. H < 0.45 indicates mean-reverting regime, H > 0.55 indicates trending regime.
ADX (Average Directional Index)
Measures trend strength regardless of direction:
- ADX < 20: Weak trend, ranging market (good for MR)
- ADX 20-25: Borderline, use caution
- ADX > 25: Strong trend (avoid mean reversion)
Variance Ratio
Complements Hurst with an independent view of regime type.
Regime Transitions
Regimes don't change instantly—there are transition periods where indicators may give conflicting signals. The platform handles this by:
- Requiring multiple regime indicators to agree
- Using composite scoring to weight regime confidence
- Applying higher thresholds during ambiguous periods
All regime indicators are backward-looking. A trend may have already begun by the time indicators detect the regime change. This is an inherent limitation of technical analysis.
Adaptive Behavior
Some platform features adapt to regime:
- Scanner results filtered to show only mean-reverting candidates
- Composite score weights can differ by timeframe
- Confirmation layers include trend context
Practical Application
When using the Mean Reversion Scanner:
- Results are pre-filtered for mean-reverting regimes
- Composite scores incorporate regime indicators
- Higher scores indicate stronger regime confidence
- Use additional confirmation during uncertain regimes