1
Forward test
Run fixed rules on new events that were not available during strategy development.
Lesson · Algorithmic and Automated Trading
Paper Trading and Forward Testing
Run the complete system on current market data without live capital, then compare backtest assumptions with observed signals, latency, and simulated fills.
Core concepts
What to understand
Keep the boundaries, state, and authority explicit.
2
Paper environment
Use broker-like APIs and simulated order handling without routing live orders.
3
Shadow mode
Calculate live decisions and intended orders while preventing submission.
Interactive lab
Backtest, Paper, and Shadow Comparison Lab
Change latency, fill realism, spread, and partial-fill assumptions. Compare historical, paper, and live-like shadow results.
Backtest, Paper, and Shadow Comparison Lab
Deterministic synthetic educational data · no broker or live-market connection
SYSTEM MODEL
Process
Promote evidence in stages
Do not move directly from historical results to automatic live execution.
Freeze
Version the strategy, parameters, data contract, and risk limits.
Run
Collect forward signals, intended orders, simulated fills, and system telemetry.
Compare
Explain differences from backtest before approving a subsequent deployment-validation stage.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately, and a wrong choice is answered on its own terms before the rule is restated.
1. Paper trading is most useful for testing:
It exercises current data, scheduling, signals, orders, and monitoring.
2. Why can paper fills be optimistic?
Real execution depends on available liquidity, queue, and order size.
3. Shadow mode should produce:
It validates logic and operations while keeping execution disabled.
4. Twelve signals; the backtest assumed 2 bps a fill; the shadow estimate is 11 bps a fill. What is the execution gap before compounding?
12 × (11 − 2) = 108 bps ≈ 1.1% before compounding. Every basis point of it should have a named cause before a subsequent deployment-validation stage.
Practical rules
- Freeze rules before a forward-test period.
- Record intended orders even when submission is disabled.
- Define measurable promotion criteria.
Common mistakes
- Treating paper profit as live proof.
- Changing parameters during the same evaluation window.
- Skipping shadow mode for a new broker or deployment.
References
Official reading
These sources cover algorithmic controls, market access, broker APIs, system operations, or security.
Alpaca · Paper Trading
Official description of a real-time simulated environment where orders are not routed to a live exchange.
FINRA · Regulatory Notice 15-09
Official guidance on supervision, testing, controls, documentation, and monitoring for algorithmic trading strategies.