What is Monte Carlo Simulation?

A mathematical technique used to estimate the probability of various outcomes in a process that cannot easily be predicted due to the intervention of random variables.

In-Depth Explanation

Traders use Monte Carlo simulations to test how a strategy might perform over thousands of randomized sequences of historical trades, helping to identify the worst-case drawdown.

Practical Example

"A Monte Carlo simulation showed that the strategy had a 5% chance of hitting a 40% drawdown."

Related Terms

Backtesting Max Drawdown Probability

Master the language of risk

Knowing the terms is just the start. Learning how to apply them is where the edge is found.

Join Drawdown Free