Traders' Roundtable

Using system backtest data, what is the math to use to calculate statistics such as probability of x% drawdown and/or y% return over n month period.

Ralph Vince's 2007 book The Handbook of Portfolio Mathematics (link) recommends one method of estimating these probabilities. He calls his approach "The Leverage Space Model". Another approach would be to write a bare bones equity curve resampling program to do your own Monte Carlo studies. (The Monte Carlo packages built-in to testing programs like Wealth-Lab, PowerST, Mechanica, Trading Blox, & Traders Studio are not configurable to measure statistics over user-specified "n month period" as you desire. They only measure stats over the full period of the initial simulation. If you backtest the system over a 16 year period, they make Monte Carlo estimates of max drawdowns and returns for 192 months. Only.). Or for USD 37.00 you could buy ProSizer, an Excel add-in product that performs Monte Carlo studies, and see whether it does enough of what you want, to justify deciding not to write your own software. ProSizer is found at http://unicorn.us.com/trading/prosizer.html