Assumptions:
Our model is built on these essential assumptions:
1. Market action discounts everything This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. The pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself Chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little with time.
In designing and testing the Tacticaltradingsignal.com strategies, we made a few simplifying assumptions. First, we ignored trading costs associated with formulating our strategies. Such costs would serve to reduce the total portfolio return. Second, we assumed adequate market depth (or liquidity) for our long (short) positions could be met through the use of indexed funds. Third, we ignored the tax disadvantages associated with short-term capital gains. Tax implications are a critical component of investment strategy.
Limitations
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. (1) NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING MODEL.
(1) ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. (2) IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. (3) THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING MODEL WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS EXISTS IN TRADING. (4) OUR MODEL IGNORES THE ADVERSE TAX CONSEQUENCES ASSOCIATED WITH SHORT-TERM CAPITAL GAINS. TAX IMPLICATIONS ARE A CRITICAL COMPONENT OF ANY INVESTMENT STRATEGY. THEREFORE, DEPENDING ON THE STRATEGY YOU CHOOSE TO IMPLEMENT, IT IS POSSIBLE THAT ANY TRADING ACTIVITY COULD RESULT IN A TAXABLE EVENT AND RESULT IN LOWER INVESTMENT RETURN.