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One way to approach this is with a form of the block bootstrap, by
resampling blocks of consecutive observations of random length with
replacement.
--- In amibroker@xxxxxxxxxxxxxxx, "sebastiandanconia"
<sebastiandanconia@xxx> wrote:
>
> I only offer this as a consideration when using such testing, not as a
> criticism of Monte Carlo Simulations. A subtle but significant point
> (IMO) when using MCS: They may or may not be applicable to
> trading/investing, because the markets don't always behave randomly.
>
> An example of when a MCS would clearly be appropriate: Let's say you're
> a defense contractor manufacturing a part for the International Space
> Station. The part is critical, but because of limitations in
> engineering technology it has a high failure rate, and there's no way of
> forecasting in advance if a part will fail. However, although the
> failure rate is high, it's also very consistent. Until technology
> advances sufficiently the only practical solution is to keep plenty of
> spares on-hand.
>
> A MCS could tell you what the optimal number of spares to keep on-hand
> would be. The part failures are random, but MC could tell you the
> likelihood of two, three, five, ten, etc., consecutive failures. You
> might determine that there would only be a 1/100,000 chance that 6
> spares in a row would fail, so you might advise NASA to stock at least 6
> spares at all times.
>
> Some trading systems, though, will be successful because they take
> advantage of repeating sequences of events, not random events. Business
> cycles go through a specific sequence, company growth follows a certain
> pattern from infancy to maturity, price trends/reversals follow a
> sequence, etc. If trades based on reliable, repeating patterns are
> taken out of order by a MCS such that a massive drawdown or a
> bankrupting series of losers occurs, that can distort the value of the
> trading method by putting the trades in an order that wouldn't occur.
>
> Soapbox alert!:) Another reason that "Why does it work?" is such an
> important question with trading systems, since a good answer to that
> question can lead to a good answer for another important question, "When
> WON'T it work?"
>
>
> S.
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