---
title: "Hidden regimes (Markov)"
description: "Hidden regimes (Markov) is a risk rule that learns calm and turbulent market states from a series and switches to Risk-Off once turbulence is likely enough."
canonical_url: "https://fincanva.com/docs/strategies/hidden-regimes-markov"
last_updated: "2026-09-24"
md_url: "https://fincanva.com/docs/strategies/hidden-regimes-markov.md"
---

# Hidden regimes (Markov)

Hidden regimes (Markov) is a quantitative risk rule: a model learns from one series' returns when the market has been calm and when it has been turbulent, gives each day a probability of being in the turbulent state, and switches the strategy to its Risk-Off allocation while that probability is at or above a threshold you choose. It is one of the three rules in the **Quantitative regimes** group of the risk condition builder, where the app describes it as "A model learns on its own when the market is calm and when it is turbulent. It gives a probability: you choose the threshold."

**Also seen as:** hidden Markov model, HMM, Markov regime switching, regime-switching model

## What is a hidden-regime model?

A hidden-regime model assumes the market moves between a small number of states that you never observe directly — calm and turbulent — each with its own typical behaviour, and that it tends to stay in one state for a while before moving to another. The states are "hidden" because only the returns are visible; the model infers from them how likely each state is on a given day. Moving between states follows a Markov chain: tomorrow's state depends only on today's, which is where the name comes from.

The rule asks for Risk-Off on day $t$ when

$$
\Pr\left(S_t = \text{turbulent} \mid r_1, \dots, r_t\right) \;\ge\; q
$$

where $S_t$ is the hidden state on day $t$, $r_1, \dots, r_t$ are the series' returns up to and including that day, and $q$ is the **Probability threshold**. In words: once the model judges the turbulent state at least $q$ likely, given everything seen so far, the strategy runs Risk-Off.

## What do the number of states and the probability threshold change?

**Number of states** sets how many regimes the model looks for: 2 (the app labels it "2 · calm / turbulent") or 3. With 3 states the model also finds a middle regime, and only the most turbulent state counts towards Risk-Off — the app's note reads "With 3 states, only the most turbulent one counts."

**Probability threshold** sets how sure the model must be. The app puts the trade-off in one line: "Risk-Off when the turbulent state is at least this likely. Higher: fewer false alarms, but it reacts later." A lower threshold switches earlier and more often; a higher one waits for stronger evidence and switches less.

## How does Fincanva handle it?

- **The series** is any instrument you pick under **Instrument**; a new rule starts on the S&P 500. The app's hint: "The model reads the returns of this series." There is no indicator, operator or pair of thresholds to set, unlike a Single series or Double series condition — see [condition types](/docs/strategies/condition-types).
- **Number of states** is 2 or 3, default 2. **Probability threshold** runs from 50% to 95%, default 70%.
- **The model uses only history available on each day.** It is recalibrated as the backtest moves forward, and a day's probability never draws on data from after that day.
- **It stays Risk-On until it has enough history to learn from**, and it stays Risk-On when the history shows no clearly distinct calm and turbulent states.
- **One threshold means no built-in hysteresis.** A Single series condition has separate thresholds to leave and re-enter Risk-On; this rule has one, so the [confirmation delay](/docs/strategies/confirmation-delay) is what damps [whipsaw](/docs/strategies/whipsaw). The app's hint on that field: "This rule has a single threshold: the delay is your brake against switching too often. 0 = immediate." **Auto-rebalance** works as it does on any condition.
- **Hidden regimes (Markov) is included from the Advanced plan**, at the strategy level and inside a Combined alike; Free and Starter do not offer it. See [what each plan includes](/docs/account-security/what-each-plan-includes).
- In the list of risk conditions a saved rule shows its short name, "Hidden regimes", with its series, its threshold as a comparison such as "≥ 70%", and its state count, such as "2 states".

## What does it look like in practice?

You add a Hidden regimes (Markov) rule on the S&P 500 with 2 states, a probability threshold of 70% and a confirmation delay of 1 week. Through a quiet stretch the model puts the turbulent state at 10%–30%, so the strategy stays Risk-On. Returns then turn large and erratic, and the probability climbs to 55%, then 74%. At 74% the rule asks for Risk-Off; one week later, the reading still above 70%, the strategy switches to its Risk-Off allocation.

A threshold of 90% on the same history would have waited longer, and might never have switched if the probability peaked at 85%. A threshold of 55% would have switched a step earlier — and would also have fired on more short bursts that faded. The numbers here are illustrative, not a suggested setting.

Fincanva is for education and illustration only. It is not personalised financial advice, and past or simulated results do not predict future ones. [Read the Terms Addendum](https://fincanva.com/terms/addendum#section-3)