What is Monte Carlo simulation?

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.

A Monte Carlo run is how we worked out how many trades it takes before a track record means anything.