All trading signals and trading strategies are built on top of certain underlying assumptions, such as assumptions about market participant behavior, and assumptions about interactions and relationships between different asset classes and different trading instruments. When we built basic trading strategies, we relied on the underlying assumptions that parameters such as 20 days and 40 days were correct for our trading instrument. With sophisticated trading strategies, such as volatility adjusted trading strategies, economic-release-based trading strategies, pair-trading strategies, and statistical arbitrage strategies, there are more underlying assumptions about the relationship between volatility measures and trading instruments, the relationship between economic releases and impact on economy, and price moves in trading instruments.

Pair-trading and statistical arbitrage trading strategies also make assumptions about the relationship between different trading instruments and how it evolves over time. As we discussed when we covered statistical arbitrage trading strategies, when these relationships break down, the strategies no longer continue to be profitable. When we build trading signals and algorithmic trading strategies, it's important to understand and be mindful of the underlying assumptions that the specific trading signals and the specific trading strategies depend on to be profitable. Market conditions and participants change all the time, hence it is possible that the assumptions that were true when these trading strategies were first built and deployed to live markets no longer hold true during certain times, or might not hold true moving forward.

When this happens, it is important to have the ability to detect, analyze, and understand what strategies will not perform as expected. It's also important to have a diverse set of trading signals and trading strategies. If we don't have enough diverse trading signals and strategies with non-overlapping underlying assumptions, it is possible that trading can get shut down completely. And if the assumptions are never true after that, it could be the end of the algorithmic trading strategy business. To summarize, the only way to deal with a situation where the trading strategies' underlying assumptions no longer hold is to have the ability to detect and understand such periods, and have a diverse set of trading signals and strategies capable of running through different kinds of market conditions and changing participants.