OPEN-SOURCE SCRIPT
Risk Simulation [Monte Carlo]
RISK SIMULATION [MONTE CARLO]
This indicator is an analytical tool designed to measure the mathematical viability of a specific trade setup and model the potential scenarios that could occur if one remains loyal to that setup.
This is NOT a Backtester
Classic backtest indicators report the performance of a trading system based on past price action. Risk Simulation, however, does not need price action; it calculates the performance distribution of a system based on its fundamental inputs (Win Rate, Reward/Risk). In this sense, risk simulations are mathematical probability models that allow us to foresee potential scenarios before entering the market. The main idea is to model the probable outcomes of a system designed with the available setup information/decisions.
HOW IT WORKS
To understand how this indicator works without getting lost in complex code, imagine this scenario:
You tell the Pine Script compiler: "I have a coin that lands on heads 35% of the time. If it's heads, I win $2.5; if it's tails, I lose $1. Now, flip this coin 5,000 times and report the statistical distribution."
MECHANICS
The technical structure of this tool is built for repeatability, utilizing a deterministic approach instead of standard pseudo-random generators:
• LCG Implementation (f_random): The script uses a Linear Congruential Generator based on Knuth and Park-Miller parameters to produce a consistent distribution.
• Seed-Based Randomness: Through the "Scenario ID" (Seed input), the engine ensures that the trade sequence remains identical across script recalculations.
• Variable Risk Model (f_simulate_trade): For each trade, a random stop-loss is assigned between the "Min" and "Max" range to calculate commission and position sizing dynamically.
• Data Management (f_run_simulation): Simulation cycles and metrics (Sharpe, Sortino, Kelly, etc.) are processed using matrix and array structures for computational efficiency.
• Percentile Interpolation (f_get_column_stats): Instead of rank-based selection, array.percentile_linear_interpolation is used to calculate the Median and Custom P% results.
HOW TO USE
The indicator requires a few core inputs to model your trading "profile":
• Setup: Define your starting capital, the percentage of risk you take per trade (compounding), your average Win Rate, and your Reward-to-Risk (R) ratio.
• Commission: Enter the percentage fee your broker charges. This is applied to both entry and exit prices for every simulated trade.
• Stops: Set a range for your stop-loss distance. This helps the model simulate how varying market volatility affects your position sizing and net profit.
• Simulation Count: Define how many "alternative futures" you want to generate. You can increase this up to 5000 for a broader statistical sample.
• Circuit Breaker: Set the percentage of capital loss that you consider "bankruptcy." If a simulation hits this level, it stops and is recorded as a "ruin" event.
OUTPUTS
The simulation results are presented in a comparative table that breaks down the performance distribution across various scenarios. Instead of a single backtest result, the table displays the Worst, Median, Best, and Mean outcomes, along with a user-defined percentile (P%) for statistical interpolation. The reporting focuses on three core areas:
• Account Dynamics: Tracks total PnL and equity evolution to show the final balance distribution.
• Risk & Survival: Highlights the Max Drawdown experienced and the Risk of Ruin (RoR), which calculates the probability of hitting your defined bankruptcy threshold.
• Performance Quality: Evaluates the trade model through risk-adjusted return ratios (Sharpe, Sortino) and system quality metrics like the SQN score and Kelly Ratio for position sizing.
DISCLAIMER
This indicator is a mathematical modeling tool based on probability theory. It does not account for market liquidity, slippage, execution errors, or the psychological challenges of live trading. The results are simulations of a specific mathematical model and should be used as a supplementary tool for risk management and strategy evaluation, not as a guarantee of future performance.
This indicator is an analytical tool designed to measure the mathematical viability of a specific trade setup and model the potential scenarios that could occur if one remains loyal to that setup.
This is NOT a Backtester
Classic backtest indicators report the performance of a trading system based on past price action. Risk Simulation, however, does not need price action; it calculates the performance distribution of a system based on its fundamental inputs (Win Rate, Reward/Risk). In this sense, risk simulations are mathematical probability models that allow us to foresee potential scenarios before entering the market. The main idea is to model the probable outcomes of a system designed with the available setup information/decisions.
HOW IT WORKS
To understand how this indicator works without getting lost in complex code, imagine this scenario:
You tell the Pine Script compiler: "I have a coin that lands on heads 35% of the time. If it's heads, I win $2.5; if it's tails, I lose $1. Now, flip this coin 5,000 times and report the statistical distribution."
MECHANICS
The technical structure of this tool is built for repeatability, utilizing a deterministic approach instead of standard pseudo-random generators:
• LCG Implementation (f_random): The script uses a Linear Congruential Generator based on Knuth and Park-Miller parameters to produce a consistent distribution.
• Seed-Based Randomness: Through the "Scenario ID" (Seed input), the engine ensures that the trade sequence remains identical across script recalculations.
• Variable Risk Model (f_simulate_trade): For each trade, a random stop-loss is assigned between the "Min" and "Max" range to calculate commission and position sizing dynamically.
• Data Management (f_run_simulation): Simulation cycles and metrics (Sharpe, Sortino, Kelly, etc.) are processed using matrix and array structures for computational efficiency.
• Percentile Interpolation (f_get_column_stats): Instead of rank-based selection, array.percentile_linear_interpolation is used to calculate the Median and Custom P% results.
HOW TO USE
The indicator requires a few core inputs to model your trading "profile":
• Setup: Define your starting capital, the percentage of risk you take per trade (compounding), your average Win Rate, and your Reward-to-Risk (R) ratio.
• Commission: Enter the percentage fee your broker charges. This is applied to both entry and exit prices for every simulated trade.
• Stops: Set a range for your stop-loss distance. This helps the model simulate how varying market volatility affects your position sizing and net profit.
• Simulation Count: Define how many "alternative futures" you want to generate. You can increase this up to 5000 for a broader statistical sample.
• Circuit Breaker: Set the percentage of capital loss that you consider "bankruptcy." If a simulation hits this level, it stops and is recorded as a "ruin" event.
OUTPUTS
The simulation results are presented in a comparative table that breaks down the performance distribution across various scenarios. Instead of a single backtest result, the table displays the Worst, Median, Best, and Mean outcomes, along with a user-defined percentile (P%) for statistical interpolation. The reporting focuses on three core areas:
• Account Dynamics: Tracks total PnL and equity evolution to show the final balance distribution.
• Risk & Survival: Highlights the Max Drawdown experienced and the Risk of Ruin (RoR), which calculates the probability of hitting your defined bankruptcy threshold.
• Performance Quality: Evaluates the trade model through risk-adjusted return ratios (Sharpe, Sortino) and system quality metrics like the SQN score and Kelly Ratio for position sizing.
DISCLAIMER
This indicator is a mathematical modeling tool based on probability theory. It does not account for market liquidity, slippage, execution errors, or the psychological challenges of live trading. The results are simulations of a specific mathematical model and should be used as a supplementary tool for risk management and strategy evaluation, not as a guarantee of future performance.
Script de código aberto
Em verdadeiro espírito do TradingView, o criador deste script o tornou de código aberto, para que os traders possam revisar e verificar sua funcionalidade. Parabéns ao autor! Embora você possa usá-lo gratuitamente, lembre-se de que a republicação do código está sujeita às nossas Regras da Casa.
Aviso legal
As informações e publicações não se destinam a ser, e não constituem, conselhos ou recomendações financeiras, de investimento, comerciais ou de outro tipo fornecidos ou endossados pela TradingView. Leia mais nos Termos de Uso.
Script de código aberto
Em verdadeiro espírito do TradingView, o criador deste script o tornou de código aberto, para que os traders possam revisar e verificar sua funcionalidade. Parabéns ao autor! Embora você possa usá-lo gratuitamente, lembre-se de que a republicação do código está sujeita às nossas Regras da Casa.
Aviso legal
As informações e publicações não se destinam a ser, e não constituem, conselhos ou recomendações financeiras, de investimento, comerciais ou de outro tipo fornecidos ou endossados pela TradingView. Leia mais nos Termos de Uso.