Questions about reinvesting and Montecarlo.

Hi, I have two questions concerning reinvestments:

1)
In the manual, in the part of Montecarlo it says:


Does this mean that the CAGR is derived from the equity of the backtest and not from the many sampled equities from Montecarlo?

How can I know the CAGR from many sampled equities with Montecarlo? Is there the possibility to have a report like this?

Confidence level CAGR DDMax Capital

10% 70% 1440$ 1390$
20% 50% 1550$ 1470$

2) What happens with the strategy when you compound and at the end, say 2020 you want to remove capital+profit? Do you screw it if you want to start the strategy again? That is to say, is there any statistical problem with that? For instance with the expectancy of a drawdown, margin call, etc? If so, is there a way to avoid them?

Thanks beforehand!

CAGR is a parameter that you determine with your Capital setting and your reinvestment algorithm. It is unrelated to Monte Carlo analysis. It is also not well suited to measure system performance. For this better test without reinvestment.

As to the second question, yes, there is a statistical problem. For continuing the strategy after removing all profits, you'll need more capital than the first time. The capital requirement grows with the square root of time. You can find details in the money management chapter.

Ok, but it would be good to have a metric like "average" CAGR or something like that. I mean, if I use an algo that compounds for 5 years what matters at year 5 is how much I made so far, although I understand that drawdowns are random since they follow the diffusion equation and thus can happen any time, particularly at the end of year 5

Concerning the second question, how much more capital would it be needed to restart a strategy?

In the manual it refers to

reinvesting--> an amount proportional to the square root of 2, for instance: Margin = OptimalF * Capital * sqrt(1 + (WinTotal-LossTotal)/Capital);

withdrawing profits--> Remaining Balance = Capital * sqrt((Capital+TotalProfit)/Capital)

Is there a mathematical equation for the relationship between required capital and time (or number of trades)?

Thanks again for your valuable input.

An average CAGR is not implemented for technical reasons- it would be computationally complex and extend the test time extremely, so it was deemed not worth the effort.

The required capital for restarting is C = C0 * sqrt(1+N/N3), where C0 = required capital from the test, N = number of trades so far, N3 = 3*annual number of trades in the test.

Thanks a lot! Is there any reason why you multiply by 3 the annual number of trades in the test?

Yes, the capital is calculated with a drawdown normalized to 3 years. Otherwise you'd get different capital requirements dependent on the test time.

Great as always! Thanks for the clarification.

Hello Jcl, thank you for the formula here...

"The required capital for restarting is C = C0 * sqrt(1+N/N3), where C0 = required capital from the test, N = number of trades so far, N3 = 3*annual number of trades in the test."

but I am not good with math. anyway to show this formula in some examples with numbers?

e.g. if I have lets say $5000 to start with the very first time. I let the Z12 system run for a year or two and now the account is lets say $10,000. and I am running margin 35 and risk 10. what do I need to do to margin so it will calculate lots based on $10,000 not the original $5000? in other words to re-invest the gains or increase lots as account increases and decrease lots as account decreases?

thanks,