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Well, the MCS is telling you the probabilities you will face given the
properties of your strategy. The fact that backtesting shows only a
certain amount of DD means nothing. Consider these 2 series of
trades:
$200
-$100
$200
-$100
$200
$200
$200
$200
-$100
-$100
In the second case, is this strategy really doing a worse job than the
first one because it's maximum drawdown is twice as much? When
applying the rest of the relevant statistics (% profitable, avg win /
avg loss, profit factor, etc.) the strategies look identical!
Probably the case is that your backtest is showing you the first
scenario, but MCS tells you that also the second scenario is very
likely to happen given your system's parameters.
Ivo Karindi
GG> Hi all,
GG> I recently bought this software MCS Pro that performs portfolio
GG> Monte Carlo simulations through tradestation strategies. It outputs a
GG> distribution that displays the probability of achieving a drawdown that
GG> would exceed a certain value over a fixed period of time. So, there is a
GG> list of drawdown values with associated probabilities of a drawdown
GG> exceeding that amount. The strange part is that the probabilities seem
GG> incredibly high. One system I tested had a maximum actual drawdown of
GG> 83,000 over a ten year period. But when I look at the probability of a
GG> drawdown exceeding 83,000 over a one year period it is 63%. I am no
GG> mathematician, but to me if the probability of witnessing a greater
GG> drawdown in one year is 63%, the probability of witnessing it in 10
GG> years would be 99.9952% (1 minus the probability of it not happening
GG> (.37) raised to the 10th power). I know these events may not be
GG> independent, but with these odds I would expect to witness at least one
GG> drawdown greater than 83,000 over ten years. I am missing something
GG> here? I feel like I am taking crazy pills. Any assistance would be
GG> appreciated.
GG> Gabriel
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