Advanced Trading Simulator

That's a great question!

A Monte Carlo simulation, as used in this simulator, is a way to predict a range of possible outcomes by running a model over and over again with different random variables. Think of it like this: Instead of flipping a coin once to guess the result, you flip it a thousand times and record the results. This gives you a much better idea of the overall probability. In this trading app, the simulation takes a set of known metrics, like the average win rate and profit per trade, and runs thousands of hypothetical trading sessions. It randomly decides whether each trade is a win or a loss based on that win rate. By running so many scenarios, it doesn't just give you one possible outcome, but a whole range of possibilities—showing you the average, best-case, and worst-case scenarios for your investment over time. This helps you understand the potential risks and rewards more clearly.

While return on investment (ROI) is a percentage, and therefore not directly influenced by the size of your starting capital, the dollar value of your starting investment is critically important for several practical reasons.

• PDT Rule Compliance: For day traders, the U.S. financial industry enforces the Pattern Day Trader (PDT) rule. This rule requires a minimum equity of $25,000 in a margin account. The simulator's account value must be at or above this level to avoid triggering a PDT violation, which can lead to trading restrictions.
• Buying Power and Concurrent Trades: The size of your account directly determines your buying power. Having a larger account ensures you have sufficient capital to enter into multiple simultaneous trades without exceeding your available funds, even if some of those trades experience a drawdown.
• Risk Management: A fundamental rule of professional trading is to risk only a small portion of your capital on any single trade, often recommended to be no more than 1%. Your account value is the basis for this calculation. A larger starting investment allows for larger trades while adhering to this critical risk management principle, protecting your capital from significant losses.
• ROI vs. Total Profit: While two accounts of different sizes might achieve the same ROI percentage, the larger account will yield a significantly higher dollar-based profit. This is because the percentage return is applied to a much larger base. Therefore, your starting investment directly influences your final profit amount, which is a key metric for long-term growth.

A drawdown, in simple terms, is the peak-to-trough decline in an investment account during a specific period. It is measured as the percentage or dollar amount your account has fallen from its most recent high. For example, if your account grows to $10,000 and then drops to $9,000, you've experienced a $1,000 (or 10%) drawdown.

Understanding drawdown is critical for two main reasons:

• Trading Fluency: A significant drawdown can directly impact your ability to trade. If your account drops below a certain threshold (like the $25,000 PDT rule minimum), it can restrict your trading activities. This loss of "trading fluency" means you might be unable to take new positions, manage existing ones effectively, or even be forced to liquidate trades to meet margin calls.
• Buying Power: As your account value decreases due to a drawdown, so does your buying power. Since many risk management strategies recommend risking only a small percentage of your total account (e.g., 1%), a smaller account size means the dollar amount you can risk on each trade also decreases. This can limit the size of your positions and potentially hinder your ability to achieve your target profits, creating a compounding effect on your overall trading performance.

A trailing stop is a dynamic risk management tool that automatically adjusts a stop-loss order as a stock's price moves in your favor. Think of it as a moving safety net that follows your profitable trade, locking in a gain without requiring you to constantly monitor the position.

The main benefit of a trailing stop is its ability to help you recapture gains. If a stock's price rises but then reverses before hitting your final target, the trailing stop will activate at the new, higher level. This allows you to exit the trade with a profit instead of watching it fall all the way back to your initial stop-loss, which might have resulted in a full loss.

It's important to note that this simulator does not incorporate trailing stops or dynamic target values, but the real-time MIDAS application does. However, in most scenarios, the addition of a trailing stop to your strategy would improve your overall outcomes, not lessen them.

Our Monte Carlo simulation is based on a simplified model that uses fixed, average values for a trading strategy's win rate, average win, and average loss. The purpose of the simulator is to provide a broad statistical probability based on these fixed inputs, rather than modeling the complex, trade-by-trade decisions that would be required for dynamic exit strategies such as trailing stops.