Some guidelines for using SQN with FVBO setups

This morning at about 4am I rolled out of bed (we have a 2 month old son so my wife and I work in shifts), did my meditation/breathing, then took the baby monitor from my wife, pulled an espresso, grabbed my laptop and got to checking out the happenings overnight. 

In the Pollinate Trading Lab, our private slack group (that is just freaking amazing) RogerDodger (his screen name) asked 

If you don't have images enabled he asked "Is there a resource where I can learn about SQN and the rules for using it with FVBO?"

Depending on when you joined the email list, you likely have a list of emails from me explaining it. I will be putting that together into a book and making a resource to members of the lab once I finish editing and organizing.

Until then, let's talk about it here. 

First let's talk about Market Regimes. Categorizing the market, any market, by a regime type is similar to having a calendar. A calendar is useful to match seasons with location, for example if I said we were going to Montana you'd want to know what date/time of year, because winter in Montana are very cold and full of ice and snow. Summers are quite warm, and there are a lot of forest fires as well. 

Knowing the date will help you figure out the average weather normally for that time of year, so that you can grab the appropriate tools. For January that's likely a coat, gloves, boots, hat and maybe a scarf...at a minimum. 

Market regimes are similar. If you know the general environment, you can then find certain characteristics of the market during those regimes. 

For me, I like to categorize the markets by direction and low/high volatility.

• Direction: Bull, Bear or Neutral
• Volatility: Low or High

Then I match them

• Bull Volatile
• Bull Quiet
• Neutral
• Bear Quiet
• Bear Volatile

I use the SQN indicator to help me categorize the environment. 

The SQN or System Quality Number is used to score trading systems and can be adapted to help categorize markets. I made the adjustment into a free indicator on Tradingview, just do an indicator search for SQN or ChrisDMacro in Tradingview and you should find it. 

Here is the formula:

SQN=((_sma*sqrt(Period))/Stdev)

So it's SMA * Square Root of 100 days/ Standard Deviation 

Or basically it looks back 100 days to see which direction it goes (up/down/sideways) and how big the daily changes are (high volatility or low volatility).

With each of the 5 regimes we can get an understanding of characteristics of that regime, the "weather" if you will. 

Here are some basic insights for each regime starting from Bull volatile and working down the list to Bear volatile. 

Bull Volatile

• This is a requirement for a long term market top. Major market tops don't happen outside a Bull Volatile regime!
• If I've been riding a long term uptrend I look to take profits in this regime or lighten my exposure
• If I'm trading more tactically I'm trading FVBO and lighter position sizes, usually max 1% risk
• Price is highly volatile up here, moves up and down are bigger
• Fear and greed is on full force!

Bull Quiet

• This is the easiest and most profitable regime to trade
• Add to winners
• Buy dips
• Buy breakouts
• Just be long
• FVBO works but very tactically on the short side. If shorting in Bull Quiet price targets are better at +1R and being very quick to stop out if it doesn't work
• If longing a FVBO in a Bull Quiet, position sizing can be up to 2%
• This is the market that most Zero Hedge/Bear Porn types hate the most. 
• As of today the Nasdaq is in a Bull Quiet regime and everyone is angry that they missed getting long. 
• Bull Quiets will last longer than you expect
• Bull Quiets can take a long time to play out, trading sideways for a while
• Bull Quiet markets are the easiest markets to trade if you DON'T OVERTHINK THEM

Neutral

• This is the best performing market for the FVBO (and FBO) setups
• Win rates are highest here and number of trades are dramatically higher
• It is very important to take profits at 1.2-1.5R in this regime
• Do not expect massive breakout runs
• This regime can last a long time
• Most traders get bored with Neutral and in turn chase highly volatile markets
• Neutral regime prints money, drop everything to trade this regime
• Works exceptionally well with currencies

Bear Quiet

• FVBO works well in this regime but flips to bear volatile quickly or back to neutral, doesn't stay here as long
• Currencies are best to trade both direction FVBO in this regime
• If equities/futures buys are usually better than sells

Bear Volatile

• Least profitable of all market regimes
• FVBO works ok with currencies
• Equities not to be traded in this regime

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If you want to talk about this stuff with other traders doing the backtests on the FVBO system, adding/improving up the FVBO system or building their own systems, we have the place for that. 

The Trading Lab is our live 24/7/365 community of like minded traders, we have traders from Hedge Funds, Prop Traders, Developers and individual traders in the group. This is a community that can help you answer questions and is hungry to improve together. If this sounds like what you've been looking for in life, join us!