Monte Carlo analysis with strange resultsMonte Carlo analysis with strange results

Discussion in 'Technical Analysis' started by hanhao, Jan 22, 2008.

  1. hanhao

    hanhao New Member

    Joined:
    Jun 19, 2007
    Messages:
    7
    Likes Received:
    0
    Trophy Points:
    1
    Monte Carlo analysis with strange results

    preliminary testing only looks at one particular instance of an infinite number of random walk paths. It is by no means conclusive. A system will probably generate multiple buy signals on the same day. A trader with sufficient capital for only 1 more trade has to select which signal to buy on. Different trade selections will yield very different final equity results. The results analyzed only accounts for 1 possible instance out of an almost infinite number of trading decision combinations. In order to verify the statistical accuracy of the result, the system would be to be tested exhaustively. This can be achieved by random walking using Monte Carlo analysis. Whenever the system generates multiple trading signals, only one would be chosen at random. This is done 10,000 times. With this, a mean net profit and accuracy together with their corresponding standard deviation can be obtained. After which, a 95% confidence interval can be determined.




    now...a typical result would look like this

    [​IMG]

    Monte Carlo analysis results for net profit
    Maximum Profit: $171,061.18 (342.12%)
    Average Profit: $142,801.91 (285.60%)
    Minimum Profit: $113,469.63 (226.94%)
    Standard Deviation: $8,974.64 (17.95%)
    Sample Size 10,000


    now what i got is this funny curve
    [​IMG]
    Monte Carlo analysis results for net profit
    Maximum Profit: $487,718.13 (975.44%)
    Average Profit: $440,281.30 (880.56%)
    Minimum Profit: $358,173.52 (716.35%)
    Standard Deviation: $48,535.88 (97.07%)
    Sample Size 10,000



    does anyone knows why?
     
  2. oxusmorouz

    oxusmorouz Well-Known Member

    Joined:
    Sep 21, 2006
    Messages:
    1,001
    Likes Received:
    133
    Trophy Points:
    63
    Location:
    Chennai
    Re: Monte Carlo analysis with strange resultsMonte Carlo analysis with strange result

    Tradesim handles an isolated part of Monte Carlo simulation alone, i.e, it does not generate hypothetical pseudo random trades but merely tests different trade combinations which could have been taken by the user in random in portfolio testing. When the number of trades is low, or when the number of securities used in testing is low, or if there are not enough multiple trades in a given day, that would explain the low degree of dispersion. In fact, tradesim's Monte Carlo simulation hardly qualifies as MCS. A true Monte Carlo simulator should be capable of running hypothetical trades using the given sample of trades and plot n number of permutations.

    I've posted an example of a true MCS, taken from Introductory Econometrics.

    http://rapidshare.com/files/87254042/MonteCarlo.xls

    Applications of MCS in system developing is explained well in Monte Carlo Simulation and System Trading by Volker Butzlaff
    There are several instances where the author is cruel to the verbs and adverbs (The book is a German translation) but the book provides certain singular ideas in applications of MCS in trading, often overlooked in most other system development books.

    Regards.
     
    Last edited: Jan 28, 2008
  3. uasish

    uasish Guest

    Re: Monte Carlo analysis with strange resultsMonte Carlo analysis with strange result

    Another Gem of a post to educate us.
     
  4. knarendra

    knarendra Active Member

    Joined:
    Jan 17, 2006
    Messages:
    350
    Likes Received:
    136
    Trophy Points:
    43
    Re: Monte Carlo analysis with strange resultsMonte Carlo analysis with strange result

    Hai,
    Anybody explain about this system simply.
     

Share This Page