Monte Carlo Simulation

Discussion in 'Strategy Building' started by Oadmani, Oct 26, 2021.

  1. Oadmani



    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?
  2. Millionaire


    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.
    Last edited: Oct 26, 2021
    Oadmani likes this.
  3. Oadmani


    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.
  4. 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.
  5. Oadmani


    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.