Monte Carlo Simulation

Monte Carlo Simulation - A statistical method that creates many random variations of a strategy’s historical performance to assess risk. In trading, Monte Carlo tests often shuffle or randomly modify trade sequences, entry points, or slippage to simulate “alternative histories”. Each simulation produces a new equity curve. By examining the distribution of outcomes (e.g. peak drawdowns, ending equity), traders estimate the likelihood of extreme results. The goal is to expose how “lucky” a backtest might have been and to see the range of possible future outcomes.