Trading glossary
Paper trading
By the PatternX team · Published
Definition
Paper trading is simulated trading with virtual money against live market prices. It lets you test a strategy, a platform or your own discipline without risking capital, but simulated fills are usually kinder than real ones.
How it works
A paper account starts with a virtual balance. When you place an order, a simulator decides whether and at what price it fills, usually from the live quote, and tracks positions, P&L and fees as if they were real. Nothing reaches the market, so your order never moves the price, never waits in a queue and never meets a counterparty who changes their mind.
Why it matters
Paper trading sits between backtesting and live trading. It checks what a backtest can't: live data feeds, order handling, alerts, today's market conditions, and whether you follow your own rules in real time. It's also a safe way to learn a platform's controls, such as approvals and kill switches, before real money is involved.
Example
For example, a hypothetical strategy averages a gain of 0.8% per trade over 40 paper trades. If live fills cost an extra 0.3% per trade in slippage and fees, the average falls to 0.5%. That's still positive, but the edge has shrunk by more than a third, and in thinner stocks the difference can be larger.
Common mistakes
- Treating paper results as a forecast of live results.
- Paper trading with a size you would never use live.
- Stopping after a short, lucky run instead of seeing a range of market conditions.
How PatternX uses it
Paper is the default execution mode for every exchange connection. On PatternX's chart-pattern signals, a paper account starts at $10,000 plus realized paper P&L, fills at the live ask or bid, simulates take-profit and stop-loss in the 5-second position loop, and estimates fees at 0.05% per side. Momentum Lab runs paper and live on the same engine. Its paper account starts at $25,000, fills at the ask or bid within your limit, caps partial fills at the displayed size, charges $0 fees and doesn't model queue position, so its fills are kinder than real ones. Going live there requires, among other checks, typing "ENABLE LIVE TRADING" and an enabled IBKR or Alpaca live connection. See automation and risk controls.