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Monte Carlo reshuffle

Randomly reordering or resampling your trades thousands of times to see the range of equity curves your edge could plausibly have produced.

Your actual equity curve is one ordering of your trades. Shuffle them and you get another equally valid history with the same expectancy and a completely different drawdown profile.

Run a few thousand shuffles and record the distribution of maximum drawdown, final return and longest losing streak. Typical result: a realised 14% maximum drawdown sits at the 30th percentile, with the 95th percentile near 26%. That upper figure is the one to size against, because nothing about your history made the mild ordering more likely than the harsh one. Resampling with replacement - the bootstrap version - goes further and also varies which trades occur.

Two limits. Shuffling assumes trades are independent, which breaks for strategies with serial correlation or regime clustering, and it cannot invent outcomes worse than any in your sample, so it understates the tail if your record has not met a crisis yet.

Related: sequence-risk, risk-of-drawdown, r-distribution, serial-correlation-of-returns

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

An equity curve and its drawdownAn account balance rising over a year, falling from a peak to a trough, then climbing back to the old peak.ACCOUNT EQUITY$20k$12k$8k024681012TIME (MONTHS)PEAK $16,000TROUGH $12,000DRAWDOWN−25%RECOVERY
Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

Educational only, not advice. Spotted an error? Post in Site Feedback.