I have a system that uses percent equity sizing. As an example, with an initial equity of $100000, it would only risk $1000 or 1% of total equity for the first trade.
I have read through https://www.amibroker.com/guide/h_montecarlo.html. It mentions regarding the configuration for position sizing when simulating using the trade list:
Don't change - uses original position size as used during backtest. Keep in mind that it always uses original dollar value of the trade (or whatever currency you use), even if your formula is using percent of portfolio equity.
As mentioned, if I use this setting, it will use the dollar value of the trade in random order. So, if I understand it correctly, for each simulation run, it could possibly use a million dollar trade that occurred at the end of the trade list right at the beginning of the simulation possibly bankrupting the system if it is a losing trade. Is this correct? If yes, then I would assume this isn't the correct setting to use for the purposes of the simulation.
I also tried using the below setting:
Simulate using portfolio equity changes
As expected, the result was quite different.
this option causes that MC simulation uses bar-by-bar portfolio equity percent changes instead of individual trades. Those individual equity changes are randomly picked and permutted to create simulation run. In this mode bar-by-bar equity changes are computed as ratio (so 10% increase is represented as 1.1), selected randomly and multiplied cumulatively. This setting allows to handle situations when you have multiple overlapping trades in your system and does not require any special setting for position sizing.
With regards to this setting, does it use bar-by-bar portfolio equity changes only a trade occurs or does it include bars where I am flat as well. For example, lets say by portfolio equity looked like follows: [100, 110, 110, 110, 100] which translates to [1, 1.1, 1, 1, 0.9]. For bar 2, 3 and 4, no trades were taken so the system was flat at 110. Would it only use [1.1, 0.9] for the purposes of the simulation or will it include the 0% changes when no trades were taken as well?