The Monte Carlo Simulator for Forex Traders

The answers are hiding in the past...

How does the Monte Carlo Simulation work?

In the most simplistic way, the Monte Carlo simulation works on the theory that the best estimate of your future performance is derived from your past trades.

So how can it predict possible outcomes based on your past trades? The law of large numbers theory. Ever heard of it? Think of a 2 sided coin. If you toss that coin 10 times your distribution of heads and tails outcome could be 8:2 (in favour of tails). Tossing this 10 times would be classed as 1 sample. Tossing the coin a further 10 more times would be sample 2. Can we expect 8 tails and 2 heads again? Perhaps, although the distribution might be 6 heads and 4 tails in this sample.


What's important to understand here is that playing the coin toss game 1 million times, the distribution will be far closer to 50/50 (heads/tails) than what we find in a smaller "sample".

Playing the coin toss game 1 million times, the distribution will be far closer to 50/50 (heads/tails) than what we find in a smaller "sample".

When we trade our first 10 trades might not produce the outcome we expect to see over 1,000 trades. But as traders it's important we understand the behaviour and characteristics of what our strategy can produce in terms of wins / losses.

This way we can stay true to our rules despite going through a period of drawdown (negative returns). Therefore reducing the chance of trading emotionally, which is the last thing we want to do as traders!

In addition to the benefits of building confidence, you'll also begin to view trading like a professional, whereby you see it as a game of statistics. Past performance is not indicative of future returns. Future return distribution can vary yet still conform to the trading strategy metrics in the past.