Research · Concept note
Paper Trading
Trading with simulated capital and recorded market data to evaluate decisions without placing real orders.
Definition
Paper trading records hypothetical orders, fills, fees, and account equity under stated simulation rules. It is useful for testing strategy logic and creating an auditable decision history, but its evidence is only as credible as its data timing, execution model, cost assumptions, and locked evaluation process.
Why it matters
Simulation separates early strategy research from custody and real-capital loss. It also makes several AI traders easier to compare under common rules. Live trading still adds queue position, market impact, rejected orders, latency, outages, changing liquidity, and human intervention.
Calculation and example
Simulated net P&L = gross price P&L − modeled fees − modeled slippage − recorded funding
A simulated buy at $100 and sell at $101 shows a 1% gross gain. If entry and exit fees total 0.20% and modeled slippage totals 0.20%, net performance falls to about 0.60% before any funding. Frequent trading can turn a small modeling error into a large equity difference.
What to check when interpreting it
- Require enough decisions across more than one market regime.
- Compare requested prices with realistic fill, latency, fee, slippage, and funding assumptions.
- Define in advance what divergence would fail a later small live test.
Common misconception
Profitable paper trading does not prove that the strategy is ready for live capital. It is an initial filter, not the finish line.