The Volatility (Regime) Switch Indicator by Ron McEwan
Here’s how you can construct a simple Excel spreadsheet
for the volatility switch indicator.
Which trading strategy should you use? This is a dilemma that most traders face,
especially when the market changes its trend, which seems to be the norm
these days. You may be dealing with a market that is reversing direction every few days, and without warning, the
market breaks out into a lengthy
trend that catches you off-guard. By
the time you can adapt to the new
mode, you could have sustained a
Years ago, some very clever individuals
came up with methods to cope
with abrupt and dramatic changes.
This concept was labeled “regime
switching,” a method for adapting
a trading strategy when the market
changes from a trending mode to a
Many regime switching algorithms
are available today. They generally
involve complex mathematical
algorithms. At the heart of most of
the regime switching strategies is a
measure of volatility. The direction of
volatility, rising or falling, as well as
the level of volatility, will give a good
indication of whether the market is in
a trending or mean reversion mode.
As a basic first step, this article will
explain how to construct a simple
volatility switch indicator to assist
in determining whether your security
of choice is trending or in a mean
To start, you should have at least
one year’s worth of data for your security.
Three to five years (or more)
will give you a more reliable picture
of how the security reacts over time
to change in volatility.