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Drawdown Monte Carlo Increase over time PROBLEM
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Drawdown Monte Carlo Increase over time PROBLEM

  #11 (permalink)
Elite Member
Sydney
 
Futures Experience: Intermediate
Platform: Multichart
Favorite Futures: Gold
 
Posts: 26 since Aug 2016
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MC

For example, I'll put in my 100 trades that took place over a month's time, and let it run over 10,000 simulations. That's,

...
The purpose of the MC simulation is to see possible outcomes and Drawdowns given that the future of your system follows the same cumulative frequency distribution your past trades has. It means that your system has to be stationary in a mathematical sense.

A first step after back testing is to do forward walking testing and do same MC on this. Then you can use real trades and see if the system is broken and should be stopped.

Its all math analysis of the system you use.

If you change system or break its rules any MC analysis is of course meaningless.

All very well explain in Howard Bandys books!!

Loop

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  #12 (permalink)
Elite Member
seoul, Korea
 
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treydog999's Avatar
 
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Loop View Post
For example, I'll put in my 100 trades that took place over a month's time, and let it run over 10,000 simulations. That's,

...
The purpose of the MC simulation is to see possible outcomes and Drawdowns given that the future of your system follows the same cumulative frequency distribution your past trades has. It means that your system has to be stationary in a mathematical sense.

A first step after back testing is to do forward walking testing and do same MC on this. Then you can use real trades and see if the system is broken and should be stopped.

Its all math analysis of the system you use.

If you change system or break its rules any MC analysis is of course meaningless.

All very well explain in Howard Bandys books!!

Loop


Let me have a crack at this question both the OP talking about draw downs growing at a rate of SQRT(N) and then Monte Carlo methods and stationary of the series.

First off if draw downs grow at a rate of sqrt(N) then all HFTs would be bankrupt by now because they would execute millions of trades in which case they would easily approach ruin, sqrt(N) actually accelerates pretty fast so these firms would have blown up within a matter of days. As we can disprove it with this single counter factual, draw downs do not model in this way.

Monte Carlo is not used to see if a time series is stationary, you would use Augmented Dickey Fuller or Engel Grainger 2 step. MC is a method that allows you to resample/boot strap a larger distribution given a limited number of samples, this will allow you to hopefully approach the true distribution of which your samples come from and get better confidence intervals. However garbage in / garbage out, if your trade samples do not come from the true distribution, you can sample it all you want and the answers are meaningless.

You can use several methods to determine if a system should be stopped. Although I am an advocate of MC, it is not how i determine if my system should be stopped. The MC may help me generate the CI's or medians, but I use statistical process control methods for the actual monitoring and alerts.

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  #13 (permalink)
Trading Apprentice
Bangkok Thailand
 
Futures Experience: Intermediate
Platform: IB, MC
Favorite Futures: Forex, CL, ES
 
Posts: 30 since May 2016
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Loop View Post
Hi Traders
As we know from Howard Bandy, Drawdown increase over time. This increase follow a diffusion equation. Square root over period.

This is really bad news because any test over longer periods will have DD of over 50% for ANY system. The only way to feel good and get it lower is to test shorter periods.

If you're following Bandy's way of doing it, then for the purpose of analyzing probable drawdowns you shouldn't use all the available data, but rather a sliding window over say the last two years or last 50 trades.

Moreover, in this sliding window you should give a higher weight to recent trades over older trades, through some sort of exponential averaging or something similar.

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