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Building & Testing a Strategy ยท Lesson 4

Monte Carlo: what could go wrong

Your back-test is just one path

Professional - Gold & Platinum

Monte Carlo: what could go wrong

In this lesson

Use Monte Carlo reshuffling of trades to estimate realistic drawdowns, and understand why sample size matters.

Key takeaways

  • Monte Carlo reshuffles trade order (or resamples trades) to show the range of possible outcomes.
  • Plan for a bad-case drawdown (e.g. the 95th percentile), not the back-test's single value.
  • Small samples are unreliable: a 50% win rate over 30 trades can easily look like 35% or 65%.
  • Prefer strategies with many trades and stable behaviour.
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Next lesson: Analysing your own trading

Educational information only - not financial advice.

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