CHAPTER 6The Monte Carlo Simulation
At this point, you could already choose the money management method you want to use. In fact, you already have enough information to roll your sleeves up and get to work, after deciding how you want to use your strategy.
But I must once again dampen the enthusiasm of those who, having seen the firepower a money management strategy can bring to bear, can't wait to put the pedal to the metal and start trading with high‐risk percentages using the fixed fractional method, or a very low delta using the fixed ratio method. In the previous chapter, I always emphasized that there's another side of the coin, which, apart from drawdowns that can be difficult for anyone to withstand, can also put an end to your strategy if your capital is now insufficient.
6.1 Using the Monte Carlo Simulation
Let's take a look at an example. Supposing a trader has €20,000 and uses a strategy with a stop‐loss of €1,500. On the basis of an analysis of his strategy's historical data, he decides on an extremely aggressive approach (the only one possible with a low initial capital) using the fixed fractional method with a 10% risk.
Let's suppose his sequence of trades is as shown in Table 6.1.
| Capital | No. of contracts | Trade |
|---|---|---|
| 20000 | 1 | 500 |
| 20500 | 1 | 600 |
| 21100 | 1 | 450 |
| 21550 | 1 | 800 |
| 22350 | 1 | −3000 |
| 19350 | 1 | −2100 |
| 17250 | 1 | 10000 |
| 27250 | 1 | 2750 |
| 30000 | 2 | 1000 |
| 32000 | 2 | … |
There are two losing trades, and both lose more than the theoretical stop‐loss (one ...
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