Paper trading provides a place to practise a decision process without committing money to a simulated order. Its results need to be interpreted within the assumptions of the simulator.
Useful questions for a simulation
A simulation can help you check whether you followed a written rule, placed an invalidation consistently or exited according to your plan. Keep a record of the decision and the result so that a favourable outcome does not conceal an execution mistake.
It can also help you become familiar with an interface. That familiarity is separate from evidence that a trading method will work in a live market.
Conditions a simulation may not reproduce
- Changing spreads, commissions and financing charges.
- Slippage, latency and partial fills.
- Order rejection or unavailable liquidity.
- Position size restrictions and account-specific rules.
- The pressure of risking money and the effect it has on decisions.
Check which costs and execution assumptions the simulator actually models. An omitted cost is not a zero cost. Do not assume a displayed result includes charges that the product does not explicitly report.
Interpret results carefully
Record both losses and gains, the sample size and the largest observed drawdown. Keep results from different instruments separate unless the same rules and assumptions have been tested on each one.
A small set of simulated wins is not a reliable estimate of future performance. Do not use it alone to decide a live position size or to describe a strategy as safe.
Keep a reproducible record
Write down the instrument, period, rule version and execution assumptions. Continue with a backtest review to structure the sample and distinguish development from a separate evaluation period.
This guide explains simulation limits. It is not an investment recommendation.