A regime filter is a rule applied before an entry signal. It asks whether the current market environment — for example, trending, range-bound, high-volatility or low-liquidity — is compatible with a particular setup.
Filter, not trigger
The filter can allow, reduce or block a setup; it does not select the exact entry. Its variables, thresholds and review schedule should be defined before evaluating results. Reclassifying the regime after every losing trade turns the filter into hindsight rather than a repeatable rule.
Regimes are estimates, not labels known with certainty in real time. A transition can therefore be detected late or misclassified. See Operational filter for the decision process and Market regime for the underlying contexts.
Sources
- James D. Hamilton, Macroeconomic Regimes and Regime Shifts, NBER Working Paper 21863 — surveys time-series methods for identifying changing regimes.
- Van Tharp Institute, Tharp Think Trading Concepts — distinguishes setup conditions from entry signals and discusses systems for different market conditions.