Market Regimes Explained
Every market is always in one of two regimes: trending or ranging. If you don’t know which one you’re trading in, you’re basically guessing. Most traders blow up because they use the wrong expectations for the wrong environment.
What a Market Regime Actually Is
A market regime is the dominant behavior pattern of price. It shapes volatility, liquidity, and order flow. The chart might look random at a glance, but the regime determines everything: speed, direction, and how clean or messy trades will be.
If you understand what drives volatility, regimes are the structure that volatility sits inside.
The Two Core Regimes
1. Trending Regime
A trending market is simple: one side is consistently more aggressive than the other. Imbalances stack in the same direction.
- higher highs + higher lows (uptrend)
- lower highs + lower lows (downtrend)
- pullbacks are shallow
- breakouts actually follow through
Trending markets are powered by stacked imbalances — repeated aggression from the same side.
2. Ranging Regime
Ranging markets are the opposite. Neither side wants to commit. Liquidity sits evenly, volatility compresses, and sentiment is neutral.
- price bounces between two clear levels
- rotations are repetitive
- breakouts fail constantly
- mean reversion dominates
Ranges often show up during volatility contraction, which ties into volatility cycles.
How to Identify the Current Regime
You don’t need indicators — just read the behavior:
| Behavior | Likely Regime |
|---|---|
| Clean directional pushes | Trending |
| Choppy rotations | Ranging |
| Frequent stop runs | Ranging |
| Deep liquidity on one side, thin on the other | Trending |
Why Traders Keep Misreading Regimes
Most traders apply the wrong expectations:
- they chase breakouts inside a range → get trapped
- they play mean reversion in a trend → get steamrolled
- they size wrong based on the wrong volatility regime
Every strategy works in one regime and fails in the other.
Regime Shifts
Regimes flip when liquidity changes or sentiment shifts.
- range → trend: imbalance builds
- trend → range: aggression fades
- volatility spike → trend continuation or reversal
Most regime shifts start with liquidity providers pulling or adding quotes — review how LPs behave to understand why.
Bottom Line
Markets aren’t random. They operate in clear regimes. Identify the regime first and your trades stop fighting the environment.