Definition
Paper Trading
Paper trading is the simulated execution of a strategy in live market conditions using virtual money, allowing a trader to test logic, execution and discipline without financial risk.
After a strategy passes backtesting, Indian quants and retail algo users often paper trade it against real-time NSE/BSE feeds before going live. This surfaces problems a historical backtest cannot, such as data-feed gaps, latency, order-rejection handling and the gap between assumed and actual fills.
Paper trading is also a behavioural rehearsal: it lets a discretionary trader practise following signals without emotional money on the line. Its limitation is that simulated fills may be optimistic, since the paper order does not actually consume liquidity or suffer real slippage and queue position.
Related terms
- SlippageSlippage is the difference between the expected price of a trade and the price at which it is actually executed, arising from market movement, spread and limited liquidity between order placement and fill.
- BacktestingBacktesting is the process of simulating a trading strategy on historical data to estimate how it would have performed, including returns, drawdowns and risk, before committing real capital.
- Walk-Forward AnalysisWalk-forward analysis is a backtesting technique that repeatedly optimises a strategy on one window of historical data and tests it on the immediately following out-of-sample window, rolling forward through time.
- Quantitative TradingQuantitative trading is an approach that uses mathematical models, statistics and computer algorithms to identify and exploit trading opportunities, replacing discretionary judgement with systematic, data-driven rules.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.