Monte Carlo thinking: how do you stress-test a strategy?

FTC Community TeamStaff14 views

Shuffling your trade results thousands of times shows the range of outcomes your strategy could have produced by luck alone. It answers the question every trader should ask: was my edge real, or was this a lucky sequence?

Monte Carlo thinking: how do you stress-test a strategy? — drawdown and recovery diagram
An equity curve during a drawdown and its recovery

Do you stress-test?

  • the tools or spreadsheets you use
  • how the results changed your confidence or size
  • the sequence risk you discovered
Monte Carlo thinking: how do you stress-test a strategy? — bid-ask spread diagram
The bid-ask spread on a currency pair

The drawdown guide covers the maths of losing streaks that stress tests reveal.

Background: Drawdown and recovery: why a 50% loss needs a 100% gain

Losses and gains aren't symmetrical. See how much you need to recover from a drawdown, what losing streaks do at different risk levels and how to set limits.

How much do you need to gain to recover from a 50% loss?

100%. The gain needed is the loss divided by one minus the loss, so larger drawdowns need disproportionately larger gains.

What is maximum drawdown?

The largest fall in account value from a peak to a later low, before a new peak is reached, usually expressed as a percentage.

Read the full guide

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