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Improve Your Trading Strategies with a Monte Carlo Simulator - YouTube
Channel: Mark Ursell
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hello this is mark from trade inform
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comm and welcome to this video on how to
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improve your trading strategies using a
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Monte Carlo simulator okay what I'm
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going to show in this video is how that
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you can create or yourself using
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Microsoft Excel a type of Monte Carlo
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simulator that will rearrange and
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randomize the results of a back test
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with the intention of checking the
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robustness of your maximum drawdown okay
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so all you need to do to start this is
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an actual back test that has been
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carried out and we've got the results of
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this shown in this column ad it's not a
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brand new page here and the only thing
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I've included on here is the number
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there were signed each of our trades a
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number and I put in a heading here
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original trades our original antiquity
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original maximum drawdown okay so our
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original trades we're just going to link
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to this spreadsheet so we're going to
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just put in equals I'm going to link to
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this column this cell here press Enter
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I'm gonna remove these dollar signs so
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that what we can do is just double click
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on the bottom right hand corner of the
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cell click on calculate and Excel will
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include the cells here in this column so
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I don't need this spreadsheet so I'm
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going to close it okay so our original
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equity we're going to start off with one
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thousand dollars and when we get to
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trades positive and negative trades are
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then to add to this now I'm going to
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copy this down again by double-clicking
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on
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bottom right hand corner of the cell
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next from this column I'm going to
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calculate our maximum drawdown for the
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original back test we're going to do
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this by the formula equals this cell
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divided by max which for Excel stands
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for the highest correct this c2 c2 I'm
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gonna make the first one of these fixed
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using f4 and put all of this in brackets
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and I take one minus and then I'm gonna
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double click and copy it down to all the
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cells below okay so the next element I'm
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going to introduce in the spreadsheet is
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the first part of the monte carlo
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simulator and we're going to need an
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element of randomness so we're going to
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use the excel formula i and do with
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brackets and this automatically
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generates a random number between 0 and
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1 with 15 digits after the decimal point
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copy this down and again like that
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and in the next cell i'm going to use
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another excel formula called rank i'm
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gonna click on here do a comma and we're
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gonna highlight our entire range of
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random numbers close the formula now go
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back into it and i'm gonna press f4 to
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make this fixed press Enter
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we can click this down so now if I click
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on the calculate button again we have a
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new order for our trades okay so now
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with the next thing we need to have in
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here is our new trades need our new
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equity and our new maximum drawdown okay
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to calculate our new trades or the
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position of our new trades using our
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random and rank function going to use
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another excel function called vlookup
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I'm going to ask it to look up this
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value here you can asked it to look it
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up and this right here just columns a
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and B
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I'm going to ask it to check in the
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second of these columns and before I
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copy this down I want to use f4 again to
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make these this array a fixed array so
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now I can click on calculate and Excel
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has automatically moved our new trades
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in the relative position of the new
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randomized order okay so our new equity
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we're going to calculate in the same way
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as our original equity so I'm going to
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price control C move that over here
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double click undo maximum drawdown again
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I'm gonna cheat and use this function
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here just drag this across here
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and double-click to copy the formula
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down to all the sounds below
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okay so here what I'm going to do is I'm
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going to calculate our prophet a prophet
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is going to say the same in both the
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original and the new versions this is
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because we're keeping all the same
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trades this particular monte carlo
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simulator is only randomizing and
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rearranging that order so we're gonna do
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this by formulas um this range here all
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our original trades center then we're
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gonna calculate our original maximum
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drawdown yeah we use the max function
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again this range and we're gonna have
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our new maximum drawdown equals maximum
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it will be this range
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and that's our press calculate we'll
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find we get a new value here and every
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time I press calculate or in fact enter
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something new I go onto formulas and
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calculate we'll get a new value for our
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maximum drawdown well we can show this
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visually quite easily as well by going
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down here pressing insert and then we
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have a line graph
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showing original equity charts if I just
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copy this paste it here click in it and
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drag it over to our new drawdown they
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have a visual representation of our new
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drawdown and again if I go on to
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formulas calculate we can see that the
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graph of our drawdown changes one thing
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you want to do when you're using a Monte
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Carlo simulator is test multiples of
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different scenarios so we could easily
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do this manually we could just click on
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this but what we would prefer to do is
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run a number of scenarios automatically
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it's what I've done to speed things up a
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bit in this spreadsheet is use a
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recorded macro and I'm going to go on to
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macros and click run and so what it's
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going to do the screen now is do 20
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versions and we can see it updating
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there and updating on the right-hand
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side in real time the different equity
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curves for the different scenarios so
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while my computer is chugging through
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these difference scenarios and say that
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if you are interested and using Excel to
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back test trading strategies
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I do have an e-book course available the
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Amazon Kindle book store and there is a
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link on the screen if you would like
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more information about this course
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so there I've used a macro it is
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actually I'm not going to go through it
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in this video but it is very easy to
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record macro doing a simple task like
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this going through and recording the
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data for each scenario so what I'm going
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what I do want to do below this is work
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out a few metrics based on what this
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data is telling is first of all the
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average we can see that out of these 20
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scenarios we've tested our average
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drawdown is five point three three
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percent which compares to our original
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maximum drawdown which was 3.75 so we
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can see straight away that our regional
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strategy may have been just through pure
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chance and may have been suggesting that
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this strategy has a lower drawdown than
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it would do in the future and use
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another formula say the max function
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again and this shows is that out of
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these 20 scenarios the maximum or the
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highest drawdown that was experienced in
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all of them was eight point seven six
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which is more than double our original
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drawdown which again could be
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significant you can do whatever metrics
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you like to ensure to your own
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satisfaction that you have a robust
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trading strategy you may want to look at
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a 85 or 95 percent percentile you may
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want to look at the standard deviation
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you may of course want to do a lot more
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than 20 runs and you are of course
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welcome to do that so I hope you found
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this spreadsheet useful hope you found
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this video useful guide in how to create
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your own Monte Carlo simulator and if
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you would like more information about
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using itself to backtest trading
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strategies and about financial markets
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in general please go to
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www.mwuclinics.com
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you
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