Monte Carlo Simulation: The Reality Check for Your Backtest | The Long & The Short Ep. 47

Start your investing journey for free! Open a zero-brokerage Demat and trading account with Zerodha to invest in Stocks, Mutual Funds, ETFs, and Bonds: https://zerodha.com/open-account/?c=Z... Welcome to The Long and The Short, a show where you can expect an honest take on trading and investing, something you won’t hear elsewhere. I’m your host, Sandeep Rao (SEBI Registered Research Analyst – INH000013059). In this episode, I explore a question every systematic trader eventually faces: your backtest gave you a beautiful equity curve — but was that curve luck, or edge? Using Monte Carlo simulations and a real two-year backtest of a 0DTE 920 straddle strategy on Nifty, I show how the same trades can produce very different drawdowns and outcomes simply by changing their order. The takeaway: your backtest is only one possible path. The real question is whether your strategy can survive the paths you didn’t see. 📌 Chapters: 0:00 – Introduction 1:12 – Origins: Ulam's 1946 idea 2:15 – What is Monte Carlo simulation? 4:08 – Inputs and methods: reshuffling vs. bootstrapping 5:56 – Backtest example: 0DTE 920 straddle 7:08 – Choosing the right sampling method 8:26 – Recap: what Monte Carlo tells us 8:37 – The story: Fermi's 1930s discovery 10:21 – Los Alamos and Ulam's solitaire 12:59 – Closing thoughts If you prefer reading, we've written a post about this episode here: https://inthemoneybyzerodha.substack.... Do check out our newsletter "Aftermarket Report" where we do a quick daily wrap-up of what happened in the markets, both in India and globally. here: https://aftermarketreport.substack.com/ Check out Varsity Live, a hands-on way to learn finance with experts. Instead of only listening, you practice in real time through activities like personal finance planning, technical charting, balance sheet analysis, and more: https://varsitylive.zerodha.com/home Disclaimer: Investments in securities are subject to market risks. Please read all related documents carefully before investing. SEBI registration does not guarantee the performance of the intermediary or assure returns to investors. The securities mentioned are for illustrative purposes only and do not constitute a recommendation. By proceeding, you acknowledge and agree that any returns shown on this platform are solely for informational purposes. They are not intended to serve as advertisements or promotional material, nor should they influence your investment decisions. Trading and investment decisions should be made at your own discretion, and it is strongly advised to consult a qualified financial advisor before acting on any information provided. Note: Some image(s) may have been created using Al, no copyright infringement is intended. About Zerodha At Zerodha, we simplify complex financial topics to empower you with the knowledge to make smarter investment choices. Whether you're just getting started or looking to sharpen your skills, we’re here to help you navigate the financial world with clarity.