Chapter 23 · Market Regime

Phase 4 · Strategy thinkingTRD-STRAT-005 · v1.0

Skills to practice: Research EdgeRecognize failure
Read first: Chapter 22 · Signal Chapter 10 · Variance and drawdown
3D simulation: Macro control room · Macro knobs(planned)

Market scene

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Lin likes the year's aggregate result. Separating trending, ranging, and stressed periods reveals profit concentrated in one environment. He wants to enable future rising periods directly, forgetting that future labels are known only afterwards.

Your decision

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How will you use environmental information without leaking future labels into the past?

Observe the result

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The same strategy runs across four synthetic environments. Each starts with independent capital and no position; results are not a mechanical decomposition of one continuous account. The generator knows labels; the strategy sees only observed prices and funding.

The mechanism

Regimes combine direction, volatility, liquidity, and participant behavior. Trends and high volatility may coexist; low volatility is not low risk. Define identification before testing conditional performance.

Hindsight labels support explanation. Tradable classifiers must read only past information and include hysteresis, mistakes, and switching costs. Closing and reopening at transitions is not free. Selecting new optimal parameters for every regime adds attempts and needs independent validation.

What it is called

Bull marketBull Market

A broadly rising environment under a research definition, with explicit horizon and classification.

Bear marketBear Market

A broadly falling environment under a research definition. Hindsight charts cannot decide past trades.

TrendTrend

Persistent direction within a specified window, not guaranteed continuation.

RangeRange

Repeated back-and-forth movement over a window; boundaries may change.

High volatilityHigh Volatility

Large changes under an explicit scale, potentially with higher costs.

Low volatilityLow Volatility

Small observed changes now, without excluding future jumps or liquidity breaks.

Real markets

Trend strategies in back-and-forth marketsStrategy research

Chapter 19 distinguishes momentum from reversion mechanisms; do not assume identical favorable regimes.

Execution under stressOrder books

Chapter 14 shows depth changes. Price labels do not replace liquidity checks.

Forced exits during declinesDerivatives

Chapter 18's feedback shows regimes involve participant constraints too.

Hands-on

LabBuild a regime applicability table25 minutesPage experiment and local text

Keep defaults and record four segments' returns, drawdowns, and costs.
Enable the available-funding condition and compare; generator labels are not strategy switches.
Produce a table of applicability, identification times, mistake costs, pauses, and independent validation plans.

360 synthetic daily bars with seed 42, not historical performance. Initial $10,000; each entry uses 50% of equity, no rebalancing while held, exit at final close. Equity exhaustion is checked at opens/closes and negative equity retained.

Research rule

Lookback bars：10Change threshold (%)：1

Keep only signals with current-bar funding between −0.02% and +0.02% (exit otherwise)

One-way fee (bps)：4Slippage including spread (bps)：2Additional impact (bps)：0

Settle funding at every close (disabling does not change observed signals)

Net return: 9.38%
Maximum drawdown at closes: 15.63%
Closed trades: 44
Net win rate: 52.27%
Final equity (USD): 10,937.56
Shutdown / negative equity (USD): Not shut down / 0

Same-quantity ledger (USD)	Amount
Gross PnL	1,320.78
Fees / slippage / impact	183.33 / 91.66 / 0
Net funding paid (negative means net received)	108.23
Net PnL = gross − all costs	937.56

Gross PnL is reconstructed using the same actual quantities and reference prices; it is not a separate zero-fee strategy. Costs affect later equity and quantities. A fixed impact parameter does not estimate book capacity. Funding may be received net.

Retrospective generator segment	Index range	Net return on independently reset capital	Drawdown	Total net costs paid (USD)
Rising segment	[0, 120)	11.34%	1.75%	120.35
Choppy segment	[120, 220)	-7.05%	9.73%	123.05
Falling segment	[220, 320)	3.76%	3.19%	73.03
Stress segment	[320, 360)	2.05%	11.69%	64.96

These labels come from the generator and are invisible to the strategy. Each segment starts with independent capital and uses preceding data for warm-up. This is not attribution of the full curve; a retrospectively selected best segment is not an identifiable live regime.

Report notes and evidence gaps

Report preview:backtest-report.md

# Backtest Report · Synthetic teaching run

- Data: generateSyntheticMarket, seed 42; 360 synthetic daily bars, t0=0 ms; OHLCV/OI/Funding available at each close. Not historical market data.
- Rule: momentum, lookback 10, threshold 1%; long/short; funding filter Disabled
- Timing: current-close signal → next-open execution. No trades during warm-up; entry budget is 50% of current equity, no rebalancing while held; forced exit at the final close.
- Costs: one-way fee 4 bps, slippage including spread 2 bps, additional impact 0 bps, close funding Settled
- Same-quantity gross PnL 1,320.78; fees 183.33; slippage 91.66; impact 0; net funding paid 108.23; net PnL 937.56 USD.
- Net return 9.38%; maximum drawdown at closes 15.63%; 44 closed trades; negative equity 0 USD.
- IS/OOS: this is full-sample exploration, not a completed blind test. Record the freeze and OOS results in the sample-split experiment; a viewed test period is no longer unseen.
- Parameter stability: parameter grids, different seeds, and cost stress remain to be tested. One curve cannot establish stability.
- Regimes (retrospective generator labels; independent capital resets per segment, not attribution of a continuous curve):
  - Rising segment [0,120): net return 11.34%; drawdown 1.75%; total cost 120.35 USD (fees 33.85, slippage 16.93, impact 0, net funding paid 69.57).
  - Choppy segment [120,220): net return -7.05%; drawdown 9.73%; total cost 123.05 USD (fees 76.24, slippage 38.12, impact 0, net funding paid 8.69).
  - Falling segment [220,320): net return 3.76%; drawdown 3.19%; total cost 73.03 USD (fees 47.82, slippage 23.91, impact 0, net funding paid 1.3).
  - Stress segment [320,360): net return 2.05%; drawdown 11.69%; total cost 64.96 USD (fees 26.16, slippage 13.08, impact 0, net funding paid 25.72).
- Promotion gates (provide evidence and pass/fail/unknown for each; this synthetic experiment does not qualify for live trading):
  - Economic logic: unknown; Can you explain who pays you and why they are willing?
  - Statistical significance: unknown; Can the result be distinguished from luck? How many attempts found it?
  - Out-of-sample: unknown; Does it hold on completely unseen data?
  - Robustness: unknown; Does it hold across parameters, markets, and periods?
  - Costs: unknown; What remains after fees, slippage, funding, and impact?
  - Risk: unknown; What is the worst-case loss and correlation with the existing portfolio?
  - Execution: unknown; Can actual execution approach backtest assumptions? What is capacity?
  - Market regime: unknown; Which regimes produce profits and which cause failure?
- Researcher notes (source timestamps, splits, stability, execution limits): (To complete)
- Limitations: entry budget at or below 1× does not mean no leverage during holding. Bankruptcy is checked only at opens/closes; no intrabar liquidation. Funding settles per bar; impact is a parameter, not a fitted book model. No live quotes or order connections.

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Course versionV1-docs; sourcep3:report:backtest-report.md；Chapter 23 / TRD-STRAT-005

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# Backtest Report · Synthetic teaching run

- Data: generateSyntheticMarket, seed 42; 360 synthetic daily bars, t0=0 ms; OHLCV/OI/Funding available at each close. Not historical market data.
- Rule: momentum, lookback 10, threshold 1%; long/short; funding filter Disabled
- Timing: current-close signal → next-open execution. No trades during warm-up; entry budget is 50% of current equity, no rebalancing while held; forced exit at the final close.
- Costs: one-way fee 4 bps, slippage including spread 2 bps, additional impact 0 bps, close funding Settled
- Same-quantity gross PnL 1,320.78; fees 183.33; slippage 91.66; impact 0; net funding paid 108.23; net PnL 937.56 USD.
- Net return 9.38%; maximum drawdown at closes 15.63%; 44 closed trades; negative equity 0 USD.
- IS/OOS: this is full-sample exploration, not a completed blind test. Record the freeze and OOS results in the sample-split experiment; a viewed test period is no longer unseen.
- Parameter stability: parameter grids, different seeds, and cost stress remain to be tested. One curve cannot establish stability.
- Regimes (retrospective generator labels; independent capital resets per segment, not attribution of a continuous curve):
  - Rising segment [0,120): net return 11.34%; drawdown 1.75%; total cost 120.35 USD (fees 33.85, slippage 16.93, impact 0, net funding paid 69.57).
  - Choppy segment [120,220): net return -7.05%; drawdown 9.73%; total cost 123.05 USD (fees 76.24, slippage 38.12, impact 0, net funding paid 8.69).
  - Falling segment [220,320): net return 3.76%; drawdown 3.19%; total cost 73.03 USD (fees 47.82, slippage 23.91, impact 0, net funding paid 1.3).
  - Stress segment [320,360): net return 2.05%; drawdown 11.69%; total cost 64.96 USD (fees 26.16, slippage 13.08, impact 0, net funding paid 25.72).
- Promotion gates (provide evidence and pass/fail/unknown for each; this synthetic experiment does not qualify for live trading):
  - Economic logic: unknown; Can you explain who pays you and why they are willing?
  - Statistical significance: unknown; Can the result be distinguished from luck? How many attempts found it?
  - Out-of-sample: unknown; Does it hold on completely unseen data?
  - Robustness: unknown; Does it hold across parameters, markets, and periods?
  - Costs: unknown; What remains after fees, slippage, funding, and impact?
  - Risk: unknown; What is the worst-case loss and correlation with the existing portfolio?
  - Execution: unknown; Can actual execution approach backtest assumptions? What is capacity?
  - Market regime: unknown; Which regimes produce profits and which cause failure?
- Researcher notes (source timestamps, splits, stability, execution limits): (To complete)
- Limitations: entry budget at or below 1× does not mean no leverage during holding. Bankruptcy is checked only at opens/closes; no intrabar liquidation. Funding settles per bar; impact is a parameter, not a fitted book model. No live quotes or order connections.

Change one variable

IfChange strategy type only

One environment can produce different performance, still requiring mechanisms to explain it.

IfEnable only the funding condition

Opportunities and costs change; filtered profit does not establish causality.

IfIncrease regime-identification delay only

Switching may execute worse. Ideal labels cannot be applied directly.

Three depths

One knowledge nodeTRD-STRAT-005: one question at each of three depths

FoundationWhy does the same strategy profit last year and keep losing this year?Chapter 23
AdvancedHow can a Regime Model adjust or pause strategies in different conditions?Advanced C · Systematic and quantitative trading
InstitutionalHow should a portfolio adjust strategy capital and risk budgets by regime?Institutional
3DAdjust rates, liquidity, inflation, the dollar, and risk appetite to observe regime shifts.Macro control room

Ask where losses occur and whether they are bearable, not only whether average profit is positive.

Questions to take away

What would show that I am wrong?

Predict regimes where the mechanism should appear.

Is there enough liquidity, and what will execution cost?

Estimate misclassification losses rather than keeping only correct labels.

After the outcome, how do I distinguish luck from decisions?

Record regime changes causing pause and review.

Chapter self-test

One idea to take away

Markets shift between trends and ranges, high and low volatility. A strategy has an edge only in suitable regimes.

Record this learning session

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Why does the same strategy profit last year and keep losing this year?

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Bull market：Not read
Bear market：Not read
Trend：Not read
Range：Not read
High volatility：Not read
Low volatility：Not read

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Chapter 23 · Market Regime

May hindsight regime labels directly drive a strategy?

Does high volatility imply a bear market?

Can four segment returns add into a continuous account?

Does profitable regime filtering prove validity?

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