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  |  MAY 1996

SIDEBAR: Monte Carlo Simulation

MONTE CARLO SIMULATION Let us assume we have a specified string of profits and losses — for example, the 1985-89 string of profits and losses for the 25-market portfolio used in the article. The Monte Carlo simulation is the technique we use to determine the probability of losing a specified number of dollars when trading this string of profits and losses before reaching a specified profit goal. The technique simulates how a trader would fare if he were to sequentially place trades that were randomly selected from the specified listing of profits and losses.

by Technical Analysis, Inc.

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