Carlos option trading
In trading system development, Monte Carlo simulation refers to process of using randomized simulated trade sequences to evaluate statistical properties of a trading system.
There are many ways to perform actual computations that differ when it comes to implementation details, but probably the most straightforward and reliable is bootstraping method that performs random sampling with replacement of actual trade list generated by the back-test. Various Monte Carlo simulation methods allow to verify robustness of the trading system, find out probability of ruin and many other statistical properties of the trading system.
In order to perform Monte Carlo simulation or bootstrap test of your trading system, AmiBroker performs the following:. This random set contains the same number of trades, they are ordered randomly and some original trades may be skipped and some used more than once permutation with repetition, or random sampling with replacement.
All of the above happens when you press Backtest button in the New Analysis window. AmiBroker's Monte Carlo simulator is so fast that it usually costs just a fraction of second on top of normal backtest procedure.
It should be well noted that simulated trades during bootstrap are performed sequentially. If your original trading system traded multiple positions at once so some or all of the trades are overlapped it may result in smaller system drawdowns being reported by bootstrap test, because drawdowns from individual trades would occur sequentially not in parallel as with overlapping trades. Those individual equity changes are randomly picked and permutted to create simulation run.
This setting allows to handle situations when you have multiple overlapping trades in your system and does not require any special setting for position sizing.
To perform simulation in this mode MC simulator randomly picks original trades and applies new position sizing as defined below. This mode is useful in cases when you don't have overlapping trades. Don't change - uses original position size as used during backtest. Keep in mind that it always uses original dollar value of the trade or whatever currency you use , even if your formula is using percent of portfolio equity.
Percent of equity - uses defined percent of current simulated equity value. Be careful when using this setting - it causes that position size of one trade depends on profits on previous trades compounding profits and creates serial dependence. It may also lead to extra compounding effect when you have overlapping trades in your original backtest as bootstrap performs trades sequentially so they don't overlap.
For this reason its use is limited to cases when no overlapping trades occur. So they are actually best points from all equities and worst points from all equities. And blue line avg is the average from all equity lines all runs. Show absolute value s in linear scale - displays equities in absolute dollar values using linear scale chart. Show absolute value s in logarithmic scale - displays equities in absolute dollar values using semi-log chart.
Show Percent change - displays equities as "rate of change" since the beginning. When this option is turned on, both dollar and percent drawdown are reported as negative numbers. This has also effect on CDF distribution. It reverses the ordering of "drawdown" column in the MC table and reverses the meaning i.
Also depending on whenever your system opens multiple overlapping positions, choose the simulation method as follows. At the top of the page we can see a table that gives values of few key statistics derived from the cumulative distribution charts CDFs of Monte Carlo simulation results. Here are sample results highlights are added manually for the purpose of illustration.
Starting equity was in this example. Test was done over 7 years EOD data. First column shows percentile level the value below which a given percentage of test observations realizations fall.
For example, the annual return value at 10th pecentile in this case It is important to note that the table above is generated with "Use negative numbers for Drawdown" turned OFF.
If we turn ON "Use negative numbers for Drawdown" option, all drawdown numbers will become negative, and the order would be reversed and the meaning of drawdown column would be reversed too, like in the table below:. This way the table can be read "row-wise" and the top of the table small percentiles refer to "pessimistic" scenarios. From Wikipedia, the free encyclopedia.
Alternative Valuation Methods for Swaptions: Valuation of fixed income securities and derivatives , pg. Pitfalls in Asset and Liability Management: Battle of the Pricing Models: Extending mean-reversion jump diffusion.