Volatility Regime (Quant Lab)

The Volatility Regime Indicator measures the current volatility environment of the market by combining two independent volatility metrics:
1. ATR-based volatility (how large price bars are)
2. Return standard deviation (how noisy or unstable returns are)

Both components are normalized (Z-score), averaged, and smoothed to produce a single Volatility Score, which identifies the market’s volatility regime.

The indicator classifies volatility into three distinct regimes:

Low Volatility (score < threshold)
• The market is calm and compressed.
• Price ranges are tight and movement is limited.
• Breakouts typically originate from this regime.
• Mean-reversion strategies perform best here.

Normal Volatility (within thresholds)
• The market is behaving normally.
• Trend-following and swing trades are stable.
• Risk is moderate.

High Volatility (score > threshold)
• The market is aggressive and unstable.
• Large price swings, news shocks, liquidations, manipulation possible.
• Risk and opportunity are both high.
• Leverage should be reduced or avoided.

A background color and regime histogram help visualize regime transitions instantly.

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⭐ What this indicator tells you (Short Summary):

This indicator answers the question:
“Is the market calm, normal, or dangerous right now?”

You should interpret it as:
• Low Volatility → market is quiet, accumulation/squeeze phase, breakout likely soon.
• Normal Volatility → ideal trading conditions; trends behave cleanly.
• High Volatility → chaotic market; big moves coming; manage risk carefully.

The Volatility Regime Indicator helps you choose:
• Which strategy type to use (trend vs mean reversion)
• What stop size is appropriate
• Whether a breakout is real or likely to fail
• When to reduce position size due to risk expansion

It is a core tool used by quantitative traders to understand market conditions before applying any strategy.