GLOSSARY · AUTOMATION
What is Monte Carlo simulation?
Monte Carlo simulation reshuffles or resamples a strategy's trade sequence thousands of times to show the range of outcomes its edge could plausibly have produced.
What it means
A backtest shows one sequence of trades — the one that happened. Reordering those same trades randomly produces a distribution of equity curves and drawdowns, which reveals how much of the observed result depended on the specific order rather than on the edge.
Why it matters
The output most worth reading is the drawdown distribution. A strategy whose historical maximum drawdown was 20% may show a 5th-percentile outcome of 35% under reshuffling, and that larger figure is the more realistic planning number.
What this changes in practice
The technique assumes trades are independent, which is imperfect — losing streaks cluster in real markets because regimes persist. That makes the simulated distribution slightly optimistic, so treat it as a floor on the possible pain rather than a ceiling.
Related terms
- Maximum drawdownMaximum drawdown is the largest peak-to-trough equity decline observed over a test period, used …
- BacktestingBacktesting runs a strategy against historical data to estimate how it would have performed, and…
- Risk of ruinRisk of ruin is the probability that an account falls below a defined threshold given a strategy…
- Sample sizeSample size is the number of trades a performance figure is computed from, and it determines how…
Educational information only, not financial advice. Trading leveraged products carries substantial risk of loss. Last updated 2026-08-11.