Trading System Risks Analysis


The Risks Section calculates some of the risks that may occur during your trading. This section calculates different drawdown metrics, a Monte Carlo analysis of system returns and finally a distribution of drawdown.

The information on drawdown includes:

Absolute Drawdown – how much the balance has declined since its initial balance.

Equity Drawdown % – how much the equity (not the balance) has declined since its most recent high as a percentage.

Balance Drawdown – how much the balance has declined since its most recent high.

Drawdown Balance % – how much the balance has declined since its most recent high.

Drawdown is probably the most important metric in a trading system since it gives hints on what position management we should use with each system. You can even test your system with other position management strategies by using the Filter & Position Management section.


Monte Carlo


This chart shows 30 possible outcomes for your trading system balance. The process to get these outcomes is:

  1. Select the returns for each trade in the system
  2. Sort the returns in a random way different from the original
  3. Calculate the balance of the system with this new order

We assume that all returns are equally likely. In the end, we get 30 balance curves that could have happened with the same probability as the real one as well as an average balance curve to get an idea of how the system would behave on average.

On the horizontal axis, the chart shows the number of deals, while on vertical axis, it shows the balance in terms of money. On the chart, the line shows how your balance would have moved after each trade if it had happened in an order different from the original.

Monte Carlo Analysis trading system


The second chart calculates the probability of drawdown in terms of percentage by using the drawdowns obtained in the Monte Carlo process.

The vertical axis shows the maximum possible drawdown in terms of percentage. The horizontal axis shows the cumulative probability of drawdown. The most likely drawdown would be at 0.5 and the least likely drawdown is found at the far ends (0.05 and 0.95). Therefore, we can set our position sizing to have a reasonable drawdown even when extreme events occur.


Drawdown distribution for a trading system

In the sample chart above, we can see that a drawdown of 30% is likely, whereas a drawdown of 45% only occurs in extreme cases.