Adam Thomas816 Adams

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What is Monte Carlo simulation in trading?

Monte Carlo simulation is a risk analysis tool that models different outcomes of a trading strategy by randomizing trade sequences. It helps traders understand how performance may vary under different market conditions. For example, even a profitable system can face long losing streaks if trades occur in unfavorable order. Monte Carlo tests resilience by simulating thousands of possible outcomes. Traders use it to evaluate risk of ruin, maximum drawdowns, and strategy robustness. It prevents overconfidence in backtests by showing potential variability in real-world performance.