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How to create a Monte Carlo simulation

Updated on 2011-10-01 04:50:08

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Monte Carlo simulation lets you create thousands of equity curves randomly from a trading system's equity curve. In order to create a random equity curve, data is split into several blocks then these blocks are arranged in a random manner.

Steps:

- Select a trading system then click on "Simulate" or "Backtest"
- In the "Strategy Report" form, select "Monte Carlo" tab
- Select the number of simulations, the simulation type and the number of bars per sample then click on "Start Simulation".

The result of the Monte Carlo simulation is shown in the following tabs:
- Monte Carlo Simulation: Displays the different equity curves that were randomly generated.
- Distributions: Shows you the distribution graph of different measures: Return, Annual Return, Maximum Drawdown and Sharpe Ratio.
- Confidence Level: Tells you with a certain percentage of confidence that a measure (Return, Sharpe...) is above a certain threshold.

Example:
90% of the simulationís tests have an equity curve with a:
- Return higher than 5%
- Annual return higher than 1%
- Maximum drawdown lower than 50%
- Sharpe ratio higher than 0.2



Notes:
- When data is split into several blocks, the "Bars per Sample" field defines the number of bars that constitutes each block.
- In the Distribution report, you can change the way data is displayed (Bar Interval) by moving the slider located at the right.








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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.