Monte Carlo Simulation

Monte Carlo simulation takes your backtest's actual trade list and randomly shuffles the trade sequence 1000 times. Each shuffle produces a different equity curve. The result is a distribution of outcomes — best case, worst case, and everything in between.

This answers the question: "How bad could this get, even if the underlying edge is real?" The answer is almost always worse than the single historical backtest suggests.

The key metric from Monte Carlo is the 5th percentile drawdown. This is the maximum drawdown in the worst 5% of simulated outcomes. If this number exceeds your personal risk tolerance, the strategy requires modification — tighter stops, smaller position sizes, or a kill switch.

A good rule of thumb: if you cannot stomach the 5th percentile drawdown emotionally (i.e., you would abandon the strategy at that point), do not run it live.

Quantinger also shows 25th/75th percentile equity curves on the Monte Carlo chart. The band between these two curves is the range where 50% of simulated outcomes fell. A narrow band indicates a consistent, predictable strategy. A wide band indicates high variance — even if the median is positive, a bad run of luck could look very different.