Skip to content

Market Regime Dashboard

August 23, 2009

The previous post, and excellent attendant reader comments, posited that effective quantitative trading needs to dynamically adapt to context. Yet, one of the most difficult systemic quant problems is identifying relevant “context”, how to measure it, and how to visualize it.

All too often, people focus exclusively on analyzing raw price charts for context (technical analysis is particular guilty). This is unfortunate, as basic time-series analysis offers to tickle out and visualize myriad richness otherwise invisible.

A series of four posts seek to build a “visual dashboard” for market regime of a single instrument (in pictures, as one is worth a 1000 words). For simplicity, each post focuses on SPY during 2007 – 2008 and explore both time domain and frequency domain. The first two posts will focus on identifying regime structure in the time domain:

  • Raw structure: visualize distribution and moments
  • Correlation structure: visualize measures of self-correlation

The latter two posts will focus on identifying regime structure in the frequency domain:

  • Frequency structure: visualize stationary sinusoidal frequencies via Fourier analysis
  • Wavelet structure: visualize non-stationary wavelets

For readers new to these techniques, they can be understood via analogy to appreciating orchestra. First, one must appreciate the progression and sequence of notes, as expressed by a sheet of music, played by each instrument; this is the time domain. Second, one must appreciate how to distinguish the melodies and harmonies played by each instrument or group of instruments; this is the frequency domain. Both are important, each providing an orthogonal (or orthonormal) perspective on the same phenomenon.

This dashboard strives to provide basic visualizations which can capture the regime of many instruments, as applicable to both trading and risk management.

13 Comments leave one →
  1. August 23, 2009 9:49 pm

    Sounds great. I can’t wait for the actual posts.

  2. MDan permalink
    August 24, 2009 8:29 am

    I’m really looking forward to this.

  3. Milton permalink
    August 25, 2009 2:24 am

    This blog is off to a great start!

  4. Manolo permalink
    August 26, 2009 6:53 pm

    Should be interesting. Regime changes identified can lead to great trading, but if you get it wrong, then vice versa. It’s another variable, another decrease in degrees of freedom. Still, we all got to spend our DoF’s on something else you got a boring trading life.

  5. John permalink
    August 28, 2009 8:58 pm

    You have my complete and undivided attention! Please show me the way.


  6. celticaces permalink
    September 1, 2009 10:47 pm

    Good evening,

    I couldn’t find your contact information, so I apologize in advance for the long post as it is meant to be an email.

    I am in the process of developing my honors thesis paper and have decided on the topic of automated trading (aka system trading, algorithm trading, etc). While I have been actively involved in the discressionary side of trading for a few years now (stocks, options, futures and forex), I am relatively new to the system trading side. I have a solid understanding of C# programming and have made multiple trading systems in Ninjatrader, but none that have stood the test of time with backtesting and subsequent live trading.

    I have found some simple systems out there in books/web sites (MACD cross, 3 moving average crosses, etc), but they don’t hold up in the long run. What I am really trying to do with this is to provide irrefutable evidence for those who believe system trading is a fools game that falls apart. For example, in Trading for a Living, Dr. Elder says black box trading is similar to letting a computer drive your car for you. He’s not alone, there are many experienced traders that don’t believe it is possible. Yet, I am convinced that given the right information, system trading can be consistently profitable over a long period of time with little to no supervision. And that’s what I intend to prove.

    Please let me know the best sources (books, websites, finance journals) out there for system trading. Some sites I have found are:
    – yours
    – bzb trader
    – Woodshedder on ibc
    – Marketsci blog

    Also, if you have a system that you have backtested and found to be profitable, I humbly request that you share it. I know this can be a touchy subject for some people, but hopefully being credited as a part of a financial journal that proves the legitimacy of what they do will be something worthwhile. Of course, all credit for the creation of the system will be given to you in the paper.

    The thesis paper will take around a year to complete, but the proposal (what I intend to do and how I intend to collect the data to do it) is due shortly, so I am trying to gather as much information as quickly as possible. Thanks for your time and I hope that we may be able to discuss this further in the future.

    Warm Regards,

    – Brian Leip

  7. quantivity permalink
    September 2, 2009 12:16 am

    @Brian: thanks for your interest; first remark is this again harks back to the Horsemen: consistent, long-term profitability for a single static strategy implies (by definition) that the generating process (whether observable or non-observable, ala state space models or HMM) underlying the strategy must satisfy both ergodicity and stationarity. The (soon-upcoming) four posts in this series will illustrate using basic time-series techniques the difficulty implied in this seemingly trite mathematical statement.

    Unfortunately, proof by construction is inherent self-disproving in this context: publishing causes non-performance, which contradicts the proof. Also, the notion of “supervision” requires careful clarification, as the mechanics of automated systems are notorious fickle due to myriad mundane computational reasons (broken comm links, broker errors, busted trades, etc).

    All that said, if you believe such a process exists, one is naturally inclined to encourage you to pursue development of that profitability in lieu of any academic work.

  8. January 28, 2010 7:15 am

    Good theme for discussions

  9. filmy permalink
    July 17, 2013 5:06 pm

    Thanks for ones marvelous posting! I really enjoyed reading
    it, you could be a great author.I will ensure that I
    bookmark your blog and will often come back sometime soon.
    I want to encourage one to continue your great posts, have a nice afternoon!


  1. Reality Intrudes « Quantivity
  2. Trade Using Market Regimes? « Quantivity
  3. Market Regime Trading Redux « Quantivity
  4. Review: Trading Regime Analysis « Quantivity

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: