Way of the turtle


Monte Carlo Reports


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Way of the turtle the secret methods of legendary traders PDFDrive

203


Monte Carlo Reports
What can we do with the simulated alternative equity curves that
are generated using Monte Carlo? We can use them to build dis-
tributions of the results for a specific measure to determine the
range of possible values one would see if the future was like any of
the alternative universes we created through the simulation. Fig-
ure 12-3 shows a distribution that was created by generating 2,000
simulated alternative universe equity curves, computing the RAR%
for each of those curves, and then plotting the distribution of those
curves on a graph.
The vertical line intersecting the curved line at the top of the
graph shows the RAR% value that 90 percent of the 2,000 simu-
lated equity curves exceeded. In this case, 90 percent of the 2,000
alternative universe curves showed more than 42 percent RAR%.
Graphs like this one are good because they help you realize
that the future is unknown and will come from a set of possibili-
ties. However, one should be very careful not to read too much
into the specifics of reports like these. Remember that these num-
bers are taken from an equity curve that is dependent on past data
and therefore suffers from all the potential pitfalls outlined in
Chapter 11. A Monte Carlo simulation does not make a poor test
better since the simulated alternative universe equity curves are
only as good as the historical simulation from which they are
derived. If your RAR% is overstated by 20 percent because of the
effect of the optimization paradox, a Monte Carlo simulation
using the same optimized parameter values still will overstate the
RAR% for the alternative universe equity curves generated in the
simulation.
204

Way of the Turtle



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