Adrian Reid explains why and when to paper trade versus relying on backtesting. He advises you can start paper trading immediately while running backtesting in parallel to learn operational lessons; common reasons to paper trade include lack of confidence from incomplete backtesting and not having capital yet. He emphasizes that paper trading should not be used to test a system's profitability—backtesting on large historical datasets is required to assess profitability and avoid false confidence from a few lucky trades.
Chapters
You don't have to wait until you've done all of the back testing and analysis to start Paper Trading Assistant. You can start it straight away and then run the back testing and analysis in parallel with the paper trading. And you'll find you probably learn a lot more about the system. Now you don't have to do that because if you, if you just devote a couple of hours, you sit down and just grind through all of the back testing, you could be ready to go and you just start, you know, start straight away. But if you are not yet confident in the system because you haven't yet done all of the backtesting, that's one major reason to be paper trading. The second major reason is you don't have the capital available for the system yet. So let's say you come to trading, you've got no money, you're saving money to start trading, then you should be paper trading, right? Because there's a lot of lessons in running the process that you should be learning. And then when you've got enough capital start, then you start. Or another scenario is what if you've got one system and it's chewing up, using up all of your capital and you're adding capital at some point in the future, the near future, to implement another system. But we don't paper trade to test the system's profitability. That's what backtesting is for. Paper trading is a really terrible way to test the system's profitability because you're going to get a couple of trades which tells you basically nothing. You know, if we've learned anything by analyzing the stock market in a systematic way, is that you need a lot of data, a lot of history and a lot of trades to figure out whether the system is actually profitable.
So a lot of people will come to the market and find a set of rules and start paper trading it, paper testing it, and after 20 or 30 trades and say, oh, these rules are amazing, I made so much money. And they start trading and they wonder why they hit a massive drawdown. The rules weren't amazing, it's just that they happen to have a couple of good trades. And that's what you saw in your paper trading. You need to back this with the whole data history and understand how it performs.
