Last updated on July 20, 2015 by Mark Fric
Predict & Verify strategy performance using Monte Carlo simulation
Predict & Verify is a new feature (tab) in Monte Carlo simulation engine that allows you to predict or verify strategy performance.
Verify is especially useful in helping you to decide f you should stop the strategy or continue trading it when your strategy is not running as expected.
How to use it?
Predict & Verify values are computed from the existing Monte Carlo simulation values, there is no special configuration necessary.
In this mode QA is predicting the potential future performance of the strategy using existing Monte Carlo simulation.
On the right side of the chart we can see the prediction of the future performance – it is a range in which the strategy equity should move depending on the existing Monte Carlo simulation.
On the bottom of the chart we can also see that projected profit for the next 100 trades is between $ +2731 to $ – 629
We should realize that real trading performance could be really like this – we can expect with high probability that it will be within the predicted range.
This mode can be used to verify if the real performance of the strategy falls inside the predicted range computed using Monte Carlo simulation.
To use Verify you have to set the date from which the verification will be performed.
In the example above we are verifying the strategy performance from 1.1.2013.
We can see that the real live performance falls within the range projected by the Monte Carlo simulation.
We can see that in this case the strategy performance already falls out of a range predicted by Monte Carlo simulation, so it looks like we should consider stopping this strategy.
How does it work?
The prediction values are computed using the existing Monte Carlo simulations. The system takes all the computed simulation runs and projects them to the future (or from the specified date).
It then displays a range between the best and worst projected strategy performance.
We can see that Monte Carlo Predict & Verify can be used to more realistically determine the potential of the strategy.
We have to realize that Monte Carlo simulations themselves are based on statistics and probability.
Every simulation is computed randomly, so the results will be slightly different every time you run it.