Volatility regimes: the strategy that works until it doesn't

[Shadow Trader]

Markets cycle between quiet and active periods. A strategy tuned in one regime often struggles in the other, and the transition is where accounts get damaged.

Take a mean reversion scalper who thrived through a quiet summer. When volatility returns in autumn with central bank surprises and data shocks, the same setups produce larger and more frequent losses. Nothing about the strategy changed. The environment did.

Ways to deal with it:

1. Measure volatility explicitly, such as with ATR on the daily chart compared with its three-month average.

2. Define regimes, such as low, normal and high, and track results separately for each.

3. Adjust or switch off strategies in the regimes where they underperform.

4. Reduce size when regimes shift, since uncertainty is highest at the transition.

Tracking results by regime reveals which approaches have a home. A trend-following scalp might be dormant for months and shine in a high-volatility stretch.

How does the journal separate results by volatility conditions?