David Mark312_ Adams#2

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What is Monte Carlo analysis in trading risk management?

Monte Carlo analysis simulates thousands of possible equity curve outcomes by randomizing the sequence of wins and losses in a strategy. Even profitable systems can experience deep drawdowns if unlucky streaks occur. For example, a system with 55% win rate may still face 10 consecutive losses, stressing capital. Monte Carlo shows probabilities of worst-case drawdowns, time to recovery, and risk of ruin. Institutions use it for portfolio stress testing, while retail traders apply it to evaluate strategy robustness. The benefit is preparing for realistic, not ideal, outcomes. The downside is simulations rely on historical assumptions, which may not hold in future crises. Monte Carlo is a powerful tool for risk-aware trading when combined with conservative position sizing.