Glossary
Monte Carlo Simulation
A statistical technique that reshuffles historical trades to estimate the distribution of possible strategy outcomes.
Monte Carlo simulation runs thousands of randomized scenarios based on a strategy's historical trades. It helps estimate the probability of drawdowns, consecutive losses, and overall profitability under different sequences of outcomes.
Key Points
- Measures risk of ruin and worst-case drawdown probabilities.
- Does not predict future returns, but estimates outcome distributions.
- Most useful after a reliable backtest has been established.