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Chapter 6
Paper trading
real data. simulated capital. the closest you get to live without real money on the line.
Published by Wick·
Paper trading is real market conditions, forward-looking. The closest you get to live — before any capital is at risk.
Paper trading is how you stop reading about a strategy and start knowing it. Real signals, real trade frequency, real drawdown behavior — without real capital at risk. By the time you go live, you already know what the strategy feels like to run.
What you learn before going live
What do you learn from paper trading before going live?
what paper trading reveals
Real trade frequencySome strategies trade a dozen times a day. Others once a week. You only discover this by watching it run. The frequency affects how it feels to hold — and whether position sizes are right for your account.
How you handle a rough patchMost strategies have at least one flat or declining period. Watching this during paper trading builds the conviction to hold through it when it matters — because you've already seen how it behaves.
Whether behavior matches the track recordCompare what you observe against the historical profile. Is the drawdown in line with the max drawdown? Is trade frequency matching expectations? Consistency between paper behavior and track record is what you are looking for.
Reading your paper results
Paper results are a reliable signal of how a strategy behaves — trade frequency, drawdown profile, signal consistency. Use them with confidence.
One thing to be aware of: in live markets there's sometimes a gap between the signal price and the actual fill — slippage, partial fills, market impact. Paper results may look slightly different from live for this reason. The gap is usually small and smaller still for strategies trading large-cap equities infrequently.
The size of this gap depends on what the strategy trades and how frequently. Strategies trading large-cap equities infrequently will see minimal slippage — the gap between paper and live is small. Strategies that trade frequently or in thinner markets will see larger gaps. For high-frequency strategies, the gap between paper and live results tends to be larger — the more frequently a strategy trades, the more slippage and execution costs compound.
What to track during your paper trading period
What should you track during your paper trading period?
Paper trading is most useful when you treat it like a live account — tracking specific things rather than passively watching numbers move. Keep a simple log with at least these four things:
paper trading log — what to record
Trade frequencyDoes the actual number of trades per week match what the strategy card described? A large gap here suggests a data or setup issue.
Drawdown profileNote when the strategy dips and by how much. Is the behavior consistent with the historical max drawdown? Are there periods of multiple consecutive losing days?
Your emotional responseWhen the strategy moves against you in a week, note your reaction. This tells you whether your position sizing feels right — and gives you the chance to adjust before real capital is involved.
Track record comparisonAt the end of each week, compare your paper returns to the strategy's live track record for the same period. Large, persistent gaps are worth investigating before going live.
The goal of paper trading isn't to confirm a strategy works — the live track record does that. The goal is to confirm it works the way you'll run it: at your position size, with your account, in the market conditions you're actually in.
Common questions
How to paper trade — FAQs
What is paper trading?
Paper trading is a method of running an algo strategy on real-time market data using simulated capital — the strategy executes real signals against a simulated balance, with no money at risk. It records fills, tracks positions, and produces a simulated P&L using the same logic it would use in a live account. What it does not fully replicate is execution reality: slippage, partial fills, and market impact are not modelled in most environments. Paper trading is used to observe actual strategy behavior in live market conditions — trade frequency, drawdown profile, and whether that behavior is consistent with the historical track record — before any capital is committed.
Is paper trading the same as live trading?
Close, but not identical. The strategy logic runs the same way. What differs is execution reality — in live trading, there's slippage (the price you get differs from the price the signal fired at), partial fills, and market impact from large orders. Paper trading doesn't always fully simulate these, so paper results may look slightly different from live. The gap is usually small but can be more meaningful for high-frequency strategies.
Does paper trading include slippage?
It depends on the platform. Some paper trading environments model slippage — applying a cost assumption to every simulated trade to better approximate live execution. Others execute at the exact signal price with no slippage adjustment at all. It's worth checking which your platform does, since it affects how closely paper results will reflect live performance. If slippage isn't modelled, treat your paper results as slightly optimistic.
key takeaway
Paper trading is how you go live with confidence instead of hope. You've seen the strategy run in real market conditions, validated the behavior against the track record, and calibrated your position sizing. That's the right starting point.