bro-market

bro-market is a satire project that aims to point out the common trading fallacies in the stock market. It is a simple Monte Carlo simulation of a stock market with independent agents, where agents buy/sell stocks depending on their trading strategies (signals), while the stocks move completely randomly.

Table of Contents

1. Setup
2. Market Rules
3. Results
4. Conclusions

Setup

curl https://sh.rustup.rs -sSf | sh
cargo build --release

To run the Monte Carlo simulation or to display the statistics, run:

target/release/mc # Will take a bit
target/release/stats

Market Rules

The market is defined by these rules:

• The market is infinitely liquid, meaning that the agent can buy and sell stocks at any time, without affecting the price.
• The market is composed of a set of 5 stocks, each with the same starting price, that are not correlated with each other.
• The stock prices change randomly each hour, by a uniformly-random amount between -1% and +1%.
• The market consists of two independent agents, "Chad The Crypto King" and "Ben The Wall Street Intern".
• If an agent detects an instrument buy signal, he will buy the instrument stocks with 40% of his total cash.
• If an agent detects an instrument sell signal, he will panic and sell all his stocks for that particular instrument.
• "Chad The Crypto King" uses head and shoulders bottom pattern to detect buy signals and head and shoulders top pattern to detect sell signals.
• "Ben The Wall Street Intern" uses double-bottom pattern to detect buy signals and double-top pattern to detect sell signals.
• Each trade costs 0.5% of the total value of the transaction.
• The agents start with 10000 USD each.
• The market is open 24/7.

The Monte Carlo simulations run for 24000 hours each, and in total, there are 5000 simulations.

Results

+-----------------------+----------------------+----------------------------+
| Simulation Statistics | Chad The Crypto King | Ben The Wall Street Intern |
+-----------------------+----------------------+----------------------------+
| Net avg.              | 9887.12 ± 4261.77    | 9197.62 ± 5254.77          |
+-----------------------+----------------------+----------------------------+
| Trade count avg       | 6.22 ± 6.29          | 142.38 ± 41.32             |
+-----------------------+----------------------+----------------------------+
| Avg. profit           | -1.13%               | -8.02%                     |
+-----------------------+----------------------+----------------------------+
| Profit p              | 36.24%               | 33.74%                     |
+-----------------------+----------------------+----------------------------+
| >2x p                 | 2.82%                | 3.30%                      |
+-----------------------+----------------------+----------------------------+
| >3x p                 | 0.46%                | 0.76%                      |
+-----------------------+----------------------+----------------------------+
| >5x p                 | 0.06%                | 0.10%                      |
+-----------------------+----------------------+----------------------------+

Conclusions

At the first sight - the results are quite obvious. "Chad The Crypto King" and "Ben The Wall Street Intern" are complete failures. They both lose money, and they both lose it fast.

But jokes aside, let's look a bit deeper. It was quite expected, that the average networth of the agents will have experienced negative gains, since the stocks move randomly and there is a trade cost. But with this simulation, I wanted to look at different aspects:

• Probability of randomly getting positive gains;
• The fact that these popular/"established" trading patterns can happen by random;

As there is not much to add to the second point, let's focus on the first one. While on average bros lost money - some of them got quite lucky. 2.82% of the simulations resulted in Chad getting more than 2x returns. For >5x returns, the probability is 0.06% and 0.10% for Chad and Ben respectively. If this simulation used ten million agents (approx. to real market) instead of two - we would have 6000 Chads and 10000 interns packing five-baggers. That's a lot of people making money in the stock market just by random. And the problem is - due to survivorship bias, we only hear about the Chads and the Bens, and not about the millions of other people who lost money.

So the next time you hear about some super-star trader in social media, who made 500% returns in a year - assume that he/she is a scammer. And given the small probability that the person is not a scammer, maybe he/she just got really lucky. So don't feel pressured to buy Rivian nr. 2 or some to-the-moon coins. Just relax and enjoy the ride.