# Monte Carlo analysis with strange resultsMonte Carlo analysis with strange results

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#1
22nd January 2008, 11:24 AM
 Member Join Date: Jun 2007 Posts: 7 Thanks: 0 Thanked 0 Times in 0 Posts
Monte Carlo analysis with strange resultsMonte Carlo analysis with strange results

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

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

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?
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#2
28th January 2008, 03:57 PM
 Member Join Date: Sep 2006 Location: Chennai Posts: 1,001 Thanks: 35 Thanked 120 Times in 72 Posts
Re: Monte Carlo analysis with strange resultsMonte Carlo analysis with strange result

Quote:
 Originally Posted by hanhao 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 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 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?
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 by oxusmorouz; 28th January 2008 at 04:05 PM.
#3
28th January 2008, 04:34 PM
 uasish Guest Posts: n/a
Re: Monte Carlo analysis with strange resultsMonte Carlo analysis with strange result

Another Gem of a post to educate us.
#4
25th January 2009, 09:37 AM
 Member Join Date: Jan 2006 Posts: 350 Thanks: 148 Thanked 136 Times in 74 Posts
Re: Monte Carlo analysis with strange resultsMonte Carlo analysis with strange result

Hai,

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