Shuffle the trades and see what happens

[Fairman]

Shuffle the trades and see what happens

A backtest produces one sequence of trades. In reality, the order could have been different, and order matters for drawdowns.

A Monte Carlo shuffle takes the list of trade results and rearranges them randomly thousands of times. Each shuffle gives a different equity curve with the same total profit but different paths.

The distribution of maximum drawdowns across those shuffles reveals how bad things could have been. The original backtest might show a 6 percent drawdown, while the shuffled runs show a 95th percentile of 14 percent. That's the better estimate of what to plan for.

It's also a way to test whether a strategy's profits depend on a small number of outsized wins. Remove the top five trades and shuffle again. If the profit disappears, the edge was a handful of lucky events.

A free spreadsheet or a few lines of code is enough to run it.

Compared with the backtest, how much worse is the worst-case drawdown from a shuffle?

[FXS Prop Desk]

Each shuffle gives a different equity curve with the same total profit but different paths.

Same total, different order, very different drawdowns: that's why the backtest's single path understates risk. Taking the 95th percentile drawdown from a few thousand shuffles and comparing it with a prop firm's max-loss limit gives a realistic probability of breaching. If that percentile is near the limit, the size is too large for the evaluation.