Q: What is your opinion on Monte Carlo Simulations and do you think they are useful for assessing a trading system? If you think it is useful, then what should somebody look out for in a Monte Carlo Simulation ( i.e. what results make a good trading system)? Do you know of a good resource (hopeful one of yours) where I can learn more about it? Thank you for taking the time to read my questions.

A: I think that simulations are very important. When you backtest you have basically done one simulation. But if your sample is large enough and represents the six different kinds of markets, then you can basically assume that you understand the R-multiples that your system will produce.

However, you don’t know what different samples from that population will produce. For example, you can get 10-20 losses in a row. What will that do? What if you position sizing is too big (what will that do) and what is too big? What will I have to live through with a high probability and with a low probability? All of these questions can only be answered by Monte Carlo simulations. So yes, they are very important.