{"id":36441,"date":"2014-02-25T11:04:42","date_gmt":"2014-02-25T16:04:42","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=36441"},"modified":"2023-05-24T17:40:38","modified_gmt":"2023-05-24T21:40:38","slug":"the-second-step-to-systems-success","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/the-second-step-to-systems-success","title":{"rendered":"The Second Step to Systems Success"},"content":{"rendered":"<p><a href=\"http:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2014\/02\/7-Steps1.png\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-36249 alignright\" src=\"http:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2014\/02\/7-Steps1-300x226.png\" alt=\"automated-trading-using-algorithms-for-and-our-seven-steps-to-systems-success-by-andrew-falde\" width=\"300\" height=\"226\" srcset=\"\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2014\/02\/7-Steps1-300x226.png 300w, \/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2014\/02\/7-Steps1-1024x772.png 1024w, \/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2014\/02\/7-Steps1.png 1425w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a>Last time we talked about Risk, which is the first and most important aspect of a trading system. We discussed how limiting risk can create higher absolute returns because of reinvestment, raising capital, and using leverage.<\/p>\n<p>Now we can talk about our second focus:\u00a0<em>Returns.<\/em>\u00a0There are three types of returns that we need to understand. First is the back tested returns. An automated system should generate back tested returns. These returns should cover different market conditions and include enough data points to be relevant.<\/p>\n<p>The second type of returns to track in automated systems is simulated returns. These are accumulated in real time over the course of weeks or months to compare and contrast the back tested returns. If the simulation is significantly different (better or worse), then we may need to head back to the drawing board.<\/p>\n<p>The third (and most important) type of returns are actual returns. These can be different than simulated returns because of liquidity assumptions and changing market conditions. There must always be a plan to turn the system off when a certain draw down level is reached that exceeds historic norms in back tested and simulated trading.<\/p>\n<p>There is one important pit fall that systems developers should consider. Back tested returns should not be dependent on a certain market condition (a sustained multi-year bull market, for example) or only work because one trade out of 200 generated most of the returns. These type of conditions do not lead to a statistically relevant system moving forward. Testing your strategy on different historic market conditions is important to know if you can expect your Risk &amp; Return assumptions to carry forward into the future.<\/p>\n<p>Andrew Falde<\/p>\n<p>No relevant positions.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Last time we talked about Risk, which is the first and most important aspect of a trading system. We discussed how limiting risk can create higher absolute returns because of reinvestment, raising capital, and using leverage. Now we can talk about our second focus:\u00a0Returns.\u00a0There are three types of returns that we need to understand. First is the back tested returns. &#8230; <a href=\"https:\/\/www.smbtraining.com\/blog\/the-second-step-to-systems-success\" class=\"more-link\">Read More<\/a><\/p>\n","protected":false},"author":1039,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1937],"tags":[3738,3618,3829],"class_list":["post-36441","post","type-post","status-publish","format-standard","hentry","category-systems-trading","tag-automated-systems","tag-back-testing","tag-simulation-trading","no-post-thumbnail"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Second Step to Systems Success | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/the-second-step-to-systems-success\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Second Step to Systems Success | SMB Training\" \/>\n<meta property=\"og:description\" content=\"Last time we talked about Risk, which is the first and most important aspect of a trading system. We discussed how limiting risk can create higher absolute returns because of reinvestment, raising capital, and using leverage. Now we can talk about our second focus:\u00a0Returns.\u00a0There are three types of returns that we need to understand. First is the back tested returns. ... Read More\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.smbtraining.com\/blog\/the-second-step-to-systems-success\" \/>\n<meta property=\"og:site_name\" content=\"SMB Training Blog\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/smbcap\/\" \/>\n<meta property=\"article:published_time\" content=\"2014-02-25T16:04:42+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-05-24T21:40:38+00:00\" \/>\n<meta property=\"og:image\" content=\"http:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2014\/02\/7-Steps1-300x226.png\" \/>\n<meta name=\"author\" content=\"Andrew Falde\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@smbcapital\" \/>\n<meta name=\"twitter:site\" content=\"@smbcapital\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Andrew Falde\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/the-second-step-to-systems-success#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.smbtraining.com\/blog\/the-second-step-to-systems-success\"},\"author\":{\"name\":\"Andrew Falde\",\"@id\":\"https:\/\/www.smbtraining.com\/blog\/#\/schema\/person\/cf351af6828c3fc8f9d9067daef8b764\"},\"headline\":\"The Second Step to Systems 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