trading systems
Monte Carlo Conniptions
Trade System Evaluation
Here we evaluate a simple trading system that will enable you to simulate the results of realistic trading with a portfolio of stocks.
Evaluating your trading system performance before you put real money on the line is essential to your profitability. In this article, we’ll evaluate a simple momentum-based system using TradeSim Enterprise, a Monte Carlo simulation/backtesting program that enables a trader to simulate the results of realistic trading with a portfolio of stocks. Then we’ll dig a little deeper, learning how to best interpret the statistics, matching system performance characteristics to a trader’s temperament.
A basic system
A simple, daily-based momentum system provides the basis for all of the statistical analysis here. It’s a moving average convergence/divergence (Macd) crossover system, but with the entry and exit triggers reversed. The system enters at the next day’s open after a buy signal, and it exits at the next day’s open after a sell signal. No stop-loss is used. Only long entries were taken, and no margin was used in testing. All key portfolio trade parameters are listed later in this article. This system is included with TradeSim.
FIGURE 1: initial test on the nasdaq 100 from february 23, 1990 to october 23, 2008. The reversed MACD crossover system test results span two bull and two bear markets.
Backtesting, Monte Carlo style
Portfolio backtesting is the only practical way to obtain realistic trading system test results, especially if you trade a variety of stocks (futures, mutual funds, and so on) at any given time. Further, such portfolio backtesting needs to be simulated using thousands of different iterations to ensure that any given mix of tradables will reliably attain profitability. TradeSim Enterprise easily automates portfolio backtesting with its advanced Monte Carlo analysis.