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Dennis
I am starting to look into this and would appreciate if you could give some
more explicit details as how you do the simulation. Is it an add-on to TS or
a plugin for excel
Thanks
----- Original Message -----
From: "DH" <catapult@xxxxxxxxxxxxxxxxxx>
To: "Omega List" <omega-list@xxxxxxxxxx>
Sent: 20 April 2002 13:02 PM
Subject: Re: AW: Monte Carlo Simulations
| > What do you think is the right way of doing MC?
|
| I can't really comment on the portfolio approach. That gets complicated.
| I trade index futures and I use the MC individually on each system. But
| anyway, here's the general idea of how it works.
|
| First, you need to generate a list of profits and losses for the
| backtest. Each backtested trade should risk an equal dollar amount.
| That's the tricky part because the "risk" is defined differently in
| different systems. Generally speaking, it's the maximum amount you can
| lose on the trade. I usually use a large disaster stop based on ATR so
| it's easy in that case.
|
| risk/trade = contracts * disaster stop
| risk/contract = X * ATR
| contracts (shares) to trade = Y * account size / ATR
| solve for Y
|
| Once you have your list of trades (each trade adjusted for equal dollar
| risk) you calculate the max drawdown. Store that number, shuffle the
| trades into a random order, calculate the MaxDD again, and store that
| number. Repeat a whole bunch of times - 10,000 is good. After you have
| the list of 10K drawdowns, sort them in order and play with the numbers
| statistically.
|
| In the end, you should generate a table like the one below. This is for
| a real system. Every system will be different. Notice how trading just a
| little bit smaller can dramatically reduce the risk of blowing out the
| account with this particular system. I consider that valuable
| information.
|
| As an aside, using Vince's methods, I get an Optimal_F of 26% which is
| consistent with the MC results. The MC says, if I risk 26% on each
| trade, there is a 99% chance of going broke. Vince fans will say you
| should find Opt_F and then back off the leverage some until you feel
| comfortable. The problem is they don't give you any way to calculate
| "some." The MC helps you decide how much of the account to risk to stay
| within your own particular comfort level.
|
| Probability of ruin (drawdown bigger than account size)
| Percent of account risked on each trade
| 0.01% 5.3%
| 0.1% 6.1%
| 0.2% 6.7%
| 0.3% 7.0%
| 0.4% 7.2%
| 0.5% 7.4%
| 0.6% 7.5%
| 0.7% 7.7%
| 0.8% 7.8%
| 0.9% 7.9%
| 1% 7.9%
| 2% 8.6%
| 3% 9.1%
| 4% 9.5%
| 5% 9.7%
| 6% 10.0%
| 7% 10.2%
| 8% 10.4%
| 9% 10.6%
| 10% 10.8%
| 11% 11.0%
| 12% 11.1%
| 13% 11.2%
| 14% 11.4%
| 15% 11.5%
| 16% 11.7%
| 17% 11.8%
| 18% 11.9%
| 19% 12.1%
| 20% 12.2%
| 25% 12.8%
| 30% 13.3%
| 35% 13.8%
| 40% 14.3%
| 45% 14.8%
| 50% 15.3%
| 55% 15.8%
| 60% 16.3%
| 65% 16.8%
| 70% 17.4%
| 75% 18.0%
| 80% 18.7%
| 85% 19.6%
| 90% 20.6%
| 95% 22.3%
| 99% 25.4%
| 99.9% 28.8%
| 99.99% 32.5%
|
| --
| Dennis
|
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