Using Volatility Regimes to Choose Between Trend and Range Strategies

Summary

The document raises the hypothesis that trend-following strategies may perform better in low-volatility conditions and asks how a trader might switch between trend and range-bound approaches. It defines volatility as the standard deviation of the price rate of change, then proposes two possible signals: compare volatility with a threshold such as its moving average, or wait for volatility to decline from an extreme, for example by moving back below an upper Bollinger Band.

The material presents these as questions and candidate rules rather than tested findings. It provides no performance data demonstrating that trend following is reliably favored by low volatility, or that either proposed trigger is effective. Any application would therefore require empirical testing across assets and periods, with clear definitions of the regimes and strategies and attention to switching costs and false signals.

Key ideas

• The document proposes testing whether trend following performs better in low-volatility regimes.
• It defines volatility as the standard deviation of price rate of change.
• One candidate rule switches strategies when volatility falls below a threshold such as its moving average.
• Another candidate waits for volatility to recede from an extreme reading.
• The document supplies no evidence that these rules improve performance.

Tags

# Using volatility cycles to switch between trend following & range bound trading?


# Using volatility cycles to switch between trend following & range bound trading?












> "...a low volatility environment is usually a good environment for trend following strategies; see Jez Liberty’s state of trend following report here..." http://quantumfinancier.wordpress.com/2010/08/27/regime-switching-system-using-volatility-forecast/ (By the way the volatility is defined as the "std. deviation of the price rate of change" )

I am not a professional quant with education on related subjects. Therefore I am not capable of testing the idea above thoroughly. Would you approve that trend following strategies(TFS) perform better under lower vol.? If yes then what would be a suitable method to exploit this idea?

==> switching to TF strategies when the volatility is below a trigger value (e.g. mov. average)? ==> switching to TF strategies when the volatility is turning down from an extreme reading (e.g. going back under the upper bollinger band)? ==> none?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.