Regime
How do we recognise that a market has changed how it behaves, and why should risk be judged differently then?
In plain words
A market regime is a stretch of time in which prices follow a recognisable pattern: a steady climb, a steady decline, a violently swinging market, or a quiet one. Regimes are defined by properties such as volatility, direction and correlation, and they end without warning.
Why it matters
Strategies, position sizes and stop distances tuned to one regime often fail in another. A sizing rule built when swings were small can be several times too large once daily moves widen, so identifying the current regime matters as much as forecasting direction.
In a real week: BTC, week of 11 January 2021
In the week of 11 January 2021, BTC returned -6.08% with a range of 31.82% and realised volatility of 154.1% a year, its largest hourly move being -5.82% on Monday. The four preceding weeks returned 22.32%, 12.05%, 25.56% and 15.61%. After four weeks of gains, this week fell while swinging across a wide range, marking a change from one pattern to another.
A common mistake
Assuming today's regime continues. Volatility and correlation cluster, so regimes persist longer than expected, but each one still ends, often during a week that looks ordinary at first.