Monte Carlo analysis with strange results

Discussion in 'Technical Analysis' started by hanhao, Jan 22, 2008.

  1. hanhao

    hanhao

    Monte Carlo analysis with strange results

    preliminary testing only looks at one particular instance of an infinite number of random walk paths. It is by no means conclusive. A system will probably generate multiple buy signals on the same day. A trader with sufficient capital for only 1 more trade has to select which signal to buy on. Different trade selections will yield very different final equity results. The results analyzed only accounts for 1 possible instance out of an almost infinite number of trading decision combinations. In order to verify the statistical accuracy of the result, the system would be to be tested exhaustively. This can be achieved by random walking using Monte Carlo analysis. Whenever the system generates multiple trading signals, only one would be chosen at random. This is done 10,000 times. With this, a mean net profit and accuracy together with their corresponding standard deviation can be obtained. After which, a 95% confidence interval can be determined.




    now...a typical result would look like this

    [​IMG]

    Monte Carlo analysis results for net profit
    Maximum Profit: $171,061.18 (342.12%)
    Average Profit: $142,801.91 (285.60%)
    Minimum Profit: $113,469.63 (226.94%)
    Standard Deviation: $8,974.64 (17.95%)
    Sample Size 10,000


    now what i got is this funny curve
    [​IMG]
    Monte Carlo analysis results for net profit
    Maximum Profit: $487,718.13 (975.44%)
    Average Profit: $440,281.30 (880.56%)
    Minimum Profit: $358,173.52 (716.35%)
    Standard Deviation: $48,535.88 (97.07%)
    Sample Size 10,000



    does anyone knows why?