Monte Carlo Simulation of trades in backtesting a la Van Tharp
I’ve been reading Van Tharp’s latest offering “Definitive Guide to Position Sizing” and revisited the concepts of expectancy, R-Multiples etc. What I found new was the idea of performing a Monte Carlo analysis as a tool to really understand the probability of profits, DD etc by performing Monte Carlo on the trades that come up in backtesting. He recommends calculating the R-Multiple for every trade in the backtest and then working out the Expectancy, Standard Deviation of R-Multiples (to ascertain variability of results) and then calculate the t-score or what he calls the System Quality Number (SQN).
On this subject, I also went through the eBook “Trading Strategies – Using computer simulation to maximize profits and control risk” by Larry Sanders which addresses the topics of probability, marble game and MonteCarlo simulation. Larry Sanders has also designed the program TradeSim which he sells at www.tradelabstrategies.com The book can also be downloaded at this site for free. This book also talks about the Monte Carlo analysis of trades.
My question is to all the mechanical traders on the forum, if any of you actually have used this type of Monte Carlo analysis to really work out the expected future behaviour of your systems in terms of probabilities and if so, then what program did you use for the Monte Carlo analysis. I would also really appreciate some feedback on the use of Trade Lab Strategies TradeSim program (this is not Compuvision’s TradeSim which most are familiar with). I am aware that the Compuvision’s TradeSim can perform Monte Carlo simulation to cover the situation in backtesting when there are more triggers than can be taken on a particular day.