Question 1

What is a Monte Carlo simulation in trading?

Accepted Answer

It is a method that takes the trades from a backtest and reshuffles or resamples them many times to build a range of possible equity curves. Instead of one path through history, you see thousands of plausible paths made from the same wins and losses, which shows how much luck shaped the single result you happened to get.

Question 2

Why reshuffle trades that already happened?

Accepted Answer

The order of your wins and losses was partly luck. The same set of trades in a different order produces a different equity curve and a different worst drawdown. Reshuffling shows the spread of outcomes that the same edge could have produced, so you are not fooled by the one ordering you saw.

Question 3

What does Monte Carlo actually tell me?

Accepted Answer

It turns a single number into a distribution. Instead of one final profit and one maximum drawdown, you get a range: a typical outcome, a good case, and a bad case. The bad case is the part most people skip, and it is usually the most useful.

Question 4

Does Monte Carlo predict the future?

Accepted Answer

No. It only reshuffles trades you already have, so it is bounded by your sample and your assumptions. If the underlying edge changes or the sample was too small, Monte Carlo cannot rescue it. It is a way to stress one backtest, not a forecast.

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