Hello, I am slightly confused regarding Monte Carlo Simulation. I downloaded the Equitymonaco software. Now, the input is, the dollar value of the profit/loss of each trade. However, some stocks are worth more and some are worth a lot less. Say, there are two stocks, one is worth 8 dollars and the other is worth 600 dollars. Now the profit/loss on the one which is 8 dollars is not equivalent to the one one 600 dollars. IF I buy 1 share of each stock, then I have deployed a much higher percentage of my capital in the stock which is 600 dollars and much less in which I have invested 8 dollars. Shouldn't the percentage return on each trade be in the input? Also, suppose, I have 10 years worth of history of my trades. Now if my capital were growing/diminishing every year, my bet size (the capital I deploy on each trade) would change accordingly, which in turn would affect the drawdown and returns. How should I account for that in the context of monte carlo simulation?
Just put in percentages into the simulator instead of dollars. So if you made 1% precent, put in $1. If you made 200% put in $200 Going forward it might be a good idea to use R multiples instead.
If I were to do this, what would be the initial capital? For instance, $1 and $200 wouldn't have the same effect on a $50000 account as compared to a $5000 account.
Initial capital amount doesn't matter since it's all relative. What you're interested in is the ratio of the final amount to the initial amount.
Suppose in scenario 1: I have 10000 initial capital. If I were going by percentages, then if I made 1 percent, I put in dollars 1 (as suggested by Millionaire above). Now suppose I have a 50000 account. I still put in dollars 1. The final equity curve will be a lot different under both the circumstances, even though the percentage increase/decrease was the same. Therefore, I am slightly confused, if I were to put in the win ratio as a dollar amount, then it would distort the equity curves.