Well since NinjaTrader 7 will probably be released in 2008 2009 2010 is released , I wanted to look one of the new features.

One of the most exciting is NinjaTrader 7 has a built in Monte Carlo analysis section. I should say cool and useful instead of exciting.

Before NinjaTrader 7 , if I wanted to run a Monte Carlo analysis , I would have to do it myself from a trade file. Pretty annoying and time consuming.

OK , WHAT IS MONTE CARLO ANALYSIS ?

There is no single Monte Carlo method; instead, the term describes a lot of approaches.

Monte Carlo simulation uses a random sampling of probability distribution as model inputs to produce hundreds or thousands of possible outcomes  providing probabilities of different outcomes occurring.

A Monte Carlo analysis looks at your trades, puts them in a random order over and over, to give you and idea of what your trading should look like over the long term. Note that I said ‘give you an idea‘. Not that anything is certain especially in trading.

OK SO WHAT DOES THAT MEAN FOR A TRADER

Using Monte Carlo analysis means given what we know about a trading systems results, we can try to get a best guess as to how a trading system would perform in the future.

Monte Carlo Simulation will randomize your trade results over and over again in multiple simulations to provide you with a normal distribution of simulation performance.

So say you have been trading for a while and you have 100 trades in NinjaTrader. What Monte Carlo will do , is randomize all your trades and give you a percentage of whatever you are measuring above or below a value.

It is a big ‘what if’ game. Looking back at the example, if we have a 100 trades and we do 100 trials , we will have information such as ’95% of the time, we made X dollars’ and things like that. Perhaps some examples would help.

EXAMPLES

Now all these examples I am talking in generalities. This is a random distribution which in itself is , well, random. Now to prevent me from having to write “the results are based on a random distribution of your result set and should only be viewed as educational in nature” everywhere , just add it to the end of every sentence. Thank you for your support.

Cumulative Profit

Click For Larger Image

So for this particular system, we are looking at the amount profitable. The bottom is a percentage of the trades. If you click on the image, you will see a highlighted area at 5% / $35.3. What that means is that 5% of the time, the profit will be less than $35. Or 95% of the time the profit will probably be greater than $35.

This chart is the maximum consecutive losses.  Here we can say that 70% of the time, we only have one loss in a row.

Finally, Drawdown. Looking at this chart, well over 90% of the ‘tests’ would have less that a $200 drawdown. Now with that information, it is much easier to detect fraud.

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