What is a Monte Carlo simulation in trading?
In one line: A Monte Carlo simulation reruns your trade results in thousands of random orders to show the range of drawdowns, streaks and outcomes that could happen.
The idea
Your trades came in one order. That order was partly luck.
A Monte Carlo simulation asks: what if the same trades had come in a different order? Then it tries thousands of orders and shows you the range.
The name comes from the casino in Monaco. It's about chance, not gambling.
A simple example
You have 100 logged practice trades:
- 40 wins of +2R.
- 60 losses of −1R.
Total: (40 × 2) − (60 × 1) = +20R. In your real order, the worst dip from a high was 7R.
Now shuffle the same 100 trades 1,000 times. The total is always +20R, because it's the same trades. But the path changes:
- In some orders, the worst dip is only 4R.
- In others, many losses land together and the worst dip is 15R or more.
The simulation might show that 1 in 10 orders had a dip deeper than 12R. A math example, not a promise.
Why it matters
Your one real record shows one path. Monte Carlo shows the paths you could have walked.
It answers practical questions:
- How deep a max drawdown should I be ready for?
- How long a losing streak is normal? Try the losing streak calculator.
- Is my risk per trade small enough to get through a bad order? See risk of ruin.
A common mistake
Treating the shuffle as proof the strategy works. Monte Carlo only reshuffles the trades you give it. If those trades came from an overfit test, the simulation inherits the problem. Feed it honest data from walk-forward testing or a fair replay test.
Plan for the bad end of the range, not the middle. If a deep but realistic dip would make you quit, lower your risk per trade now.
Questions
What does a Monte Carlo simulation tell a trader?
The range of drawdowns and losing streaks a set of trades could produce in different orders, so you can size for the rough patches.
How many simulations should you run?
Usually 1,000 or more. More runs give a smoother picture of the range.
Can I run a Monte Carlo simulation without coding?
Yes. Some spreadsheet templates and testing tools have it built in. The idea is simple: shuffle your logged results and track the worst dip each time.
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