Monte Carlo simulation saved me from taking a huge loss — Transcript

Full transcript

1. 0:00Hey guys, it's so in this short video I
2. 0:02want to show you a case where running
3. 0:04Monte Carlo simulations helped me avoid
4. 0:07a huge loss. And the thing is I did not
5. 0:09expect that at all because normally when
6. 0:11I use Monteol simulations I do it to see
7. 0:14for example whether or not my strategy
8. 0:16is overfit or considering my risk
9. 0:18tolerance it helps me know how much
10. 0:20position sizing I want to do. But the
11. 0:22case that I'm talking about now has
12. 0:24nothing to do with those. So let me show
13. 0:26you what I mean. Now this is the
14. 0:27strategy that I'm talking about. You see
15. 0:29this equity curve? It looks awesome,
16. 0:31right? It basically just keeps going up
17. 0:33and up. Now it is for the Trump memecoin
18. 0:35and the duration is almost 6 months and
19. 0:39everything looks great. Now the penal is
20. 0:4130% but with a max draw of minus 8%. Now
21. 0:44considering my risk tolerance is usually
22. 0:46minus 30%, that means I could have
23. 0:48easily multiplied this by a number such
24. 0:51as like three and then my P&L would have
25. 0:54been near 100, right? So that would have
26. 0:56been fantastic. But here's the thing,
27. 0:59the win rate is 100%. Right? So it means
28. 1:02basically it's never losing. And yes, it
29. 1:05is a short only strategy. And the
30. 1:07average holding time is 24 hours, which
31. 1:09is a bit too high considering the time
32. 1:12frame of the strategy was only 15
33. 1:14minutes. And the sharp ratio was 2.55
34. 1:17and the calmer ratio was 8. So this
35. 1:20looks fantastic. But if you've been
36. 1:22following me for a while, you know that
37. 1:24recently I released this Monte Carlo
38. 1:26feature, right? So when I ran it for
39. 1:29this strategy just to make sure it's not
40. 1:31overfit because the results are like too
41. 1:34good to be true especially this 100% win
42. 1:37rate. So that is definitely too good to
43. 1:39be true and I wanted to see some losses
44. 1:41because if the strategy has no losses I
45. 1:44just cannot trust it because it
46. 1:45basically means it's like a martingale
47. 1:47strategy which we all know makes you a
48. 1:50lot of money until you actually get
49. 1:52liquidated right. So seeing a win rate
50. 1:55of 100% is very scary and risky. Now let
51. 1:58me show you the result of the Monte
52. 2:00Carlo. So by the way, if you don't know
53. 2:02how to run the script that I shared with
54. 2:04you guys for a Monte Carlo, you
55. 2:05basically put the code inside this file
56. 2:08and it needs to be in the root of your
57. 2:10project. And then in the terminal, you
58. 2:12simply say Python and then the name of
59. 2:14the file, which for me is test Monte
60. 2:16Carlo, right? And inside this file, you
61. 2:18want to make sure you've selected the
62. 2:19correct symbol, exchange, the time
63. 2:21frame, and the name of the strategy and
64. 2:24the data routes in case you are using
65. 2:26which this strategy is and also give it
66. 2:28a starting or ending date, the number of
67. 2:31scenarios you want to run and things
68. 2:32like that. But anyways, let's go here.
69. 2:35Now, this is the result. The original
70. 2:37has a P&L of 30%, the sharp of 2.64, and
71. 2:41the win rate of 100. exactly what I just
72. 2:43displayed you from within the dashboard
73. 2:45of the JC framework. But if we look at
74. 2:47the best 5%, so it goes as well as 3.74.
75. 2:51The MU rate is still 100%. In the
76. 2:54median, the M win rate is 95%. So that's
77. 2:57still really high and it looks
78. 2:58wonderful. The sharp ratio for the
79. 3:00median is 1.19. So again, this looks
80. 3:03really, really awesome, right? But wait
81. 3:05a minute, let's take a look at the
82. 3:08chart. And this is how it looks like.
83. 3:11Now, the thing is, most of them are
84. 3:13indeed doing great. But some of them,
85. 3:16not only they're not doing great, but
86. 3:18they're actually going bananas. Like,
87. 3:20this doesn't make any sense. The equity
88. 3:23curve, even though it used to do really
89. 3:25good, at some point it goes straight to
90. 3:28zero. Some of them did good until here
91. 3:30and then they went straight to zero. So,
92. 3:33why is this happening? Because if the
93. 3:35strategy has a stop-loss, which it does,
94. 3:38this shouldn't be happening, right? So
95. 3:39let's go to the code of the strategy.
96. 3:41And you see when the position opens, I
97. 3:44was submitting both the subplus and the
98. 3:46take profit. But I also had this line.
99. 3:48Now, by the way, this wasn't here. And
100. 3:50that's actually what's wrong with it.
101. 3:52Right? So we also had this line which is
102. 3:54the update position method of Jesse,
103. 3:57which basically means once another
104. 3:59candle closes after I already have an
105. 4:01open position, I want to do something.
106. 4:03So in here, I'm checking if it's a short
107. 4:05position, which it is because it's a
108. 4:06short only position. I'm updating my
109. 4:08stop loss. Now, when you do this,
110. 4:10basically, you're creating some kind of
111. 4:12trailing a stop, right? Because on every
112. 4:13new candle, you're updating your stop
113. 4:15loss. Now, remember this is short
114. 4:17position, right? So, I want to bring
115. 4:19down my stop loss. So, as soon as the
116. 4:21price goes up again, I will close it,
117. 4:23right? So, I'm using this syntax. So,
118. 4:25the stops equals the quantity of the
119. 4:27current position, which makes sense. And
120. 4:29then as a price I'm saying the minimum
121. 4:32of either the average stop loss which in
122. 4:34this case means the previous stop loss
123. 4:36price that we had. Now in the beginning
124. 4:38we submitted here right? So for a short
125. 4:41position the stop loss is being this. So
126. 4:43the current price plus two times the
127. 4:45ATR. But either this or if we've already
128. 4:49updated it. So this will give us the
129. 4:51average price. Now the average keyword
130. 4:54here works only if you have multiple
131. 4:56stops prices. But in this case we don't.
132. 4:58We only have one, right? So again, it
133. 5:01will give us that price and the big
134. 5:02comma. Now the big comma is returning
135. 5:04the values of the comma indicator with
136. 5:07the period of 42. That's it basically.
137. 5:10Now I was also selecting the current
138. 5:12candles, but the syntax isn't really
139. 5:14true. Like I could have just done this
140. 5:16by the way because I'm using the same
141. 5:18time frame. So this could have been just
142. 5:20this. But anyways, I don't want to go
143. 5:21through this exact syntax or entry or
144. 5:23exit rules of the strategy. I just want
145. 5:25to show this that basically I was
146. 5:27updating my stop loss. So either this
147. 5:30value which is like a moving average
148. 5:32right and the average is stop price. So
149. 5:36I I was just saying that give me
150. 5:38whichever is lower. So why is this
151. 5:40happening? So it goes really well but
152. 5:42then it goes to zero right and the win
153. 5:44rate is 100%. So I figured what's
154. 5:47happening here. Basically I'm updating
155. 5:50my stop loss price very soon after the
156. 5:53position opens. So we can assume that
157. 5:55this stop loss that we had here doesn't
158. 5:57really matter and the new price was
159. 6:00being either the previous price which of
160. 6:02course would have been fine right or
161. 6:05this become a value here so the only
162. 6:07thing that could have caused things to
163. 6:09go wrong was this and then I figured you
164. 6:12see this is supposed to be a moving
165. 6:13average so what if the value of it is
166. 6:17actually below the current price and if
167. 6:19that's happening then it is no longer a
168. 6:22stop loss right so because if The
169. 6:23current price is here and it's a short
170. 6:26position. So your stop loss should
171. 6:28always be high, right? For example, in
172. 6:30here. But if you suddenly put it in
173. 6:31here, then again it is no longer a stop
174. 6:34loss, right? So it is a limit order. So
175. 6:36it is waiting for the price to go here.
176. 6:39So it will be your takeprofit order. But
177. 6:41what if the price went up? Then your
178. 6:45limit order will stay here forever. And
179. 6:48because you keep getting losses then
180. 6:52your equity curve will go to zero. So
181. 6:54that was what was happening here. So the
182. 6:56fix was to simply do this to add this
183. 7:00value here to say if the big comma is
184. 7:03bigger than the current price. I want to
185. 7:06do this to make sure it is not below the
186. 7:09current price. And when I did this then
187. 7:12the equity curve went from this to this.
188. 7:16So you see now instead of
189. 7:20like 30% I'm making 5%. Although to be
190. 7:24fair the max went down from - 8% to -4%.
191. 7:29So it's still not that bad. In fact the
192. 7:32win rate is still 70% which is good and
193. 7:34the sharp ratio is 1.29 29 which again
194. 7:37is good but it isn't this it's not like
195. 7:41100% good anymore right and more
196. 7:44importantly the strategy is safe to
197. 7:46trade now so if you are using a
198. 7:49technique like what I was doing in this
199. 7:50strategy using a trailing stop-loss
200. 7:53chances are you might also get some
201. 7:55things wrong and maybe in your single
202. 7:57back test you don't see that things are
203. 8:00going wrong and Monte Carlo could
204. 8:02actually save you from taking a huge
205. 8:05loss at some point in the future. So
206. 8:07that's it guys. I just wanted to share
207. 8:08this experience with you because from
208. 8:10now on I will never forget about this
209. 8:13and I will definitely run Monte Carlo
210. 8:15every single time before going live. Now
211. 8:17this is a new type of video that I just
212. 8:18did. So let me know what you guys think.
213. 8:20If you enjoyed the video, please give it
214. 8:22a like and subscribe to the channel for
215. 8:24more videos like this. Thank you so much
216. 8:25for watching. I'll see you in the next
217. 8:27one.
218. 8:32>> [music]