Monte Carlo Simulation
Monte Carlo simulation for trading strategies randomly reorders the sequence of historical trade returns thousands of times. Each permutation produces a different equity curve. The distribution of those curves shows you the realistic range of outcomes — not just the one path history happened to take.
Why reshuffle trade returns?
A backtest is a single path through history. A long winning streak at the start looks very different from the same winning streak at the end of the test period. Monte Carlo simulation shows you the distribution of outcomes across all possible orderings of your trades.
What does it tell you?
The 5th percentile of the Monte Carlo equity curve distribution is a conservative estimate of your strategy's worst expected drawdown. If the 5th-percentile drawdown exceeds your risk tolerance, you should reduce position size or add a portfolio-level stop before going live.