Paper trading means recording or simulating trades without creating the normal economic exposure of a real trade. It may use current quotes, replayed data or a broker's demo engine.
What it is used for
It can rehearse a procedure and test signals, orders, sizing, alerts and the journal without putting capital at risk. Profit and loss remain hypothetical: the simulation cannot fully reproduce queue position, liquidity, market impact, slippage, broker rejects or the pressure of a real loss.
Paper trading and forward testing are not synonyms. Paper describes the simulated environment; a forward test prospectively evaluates a frozen set of rules and may also run in limited live mode. See Paper trading for the full operating protocol and Forward test for the time-based distinction.
Sources
- National Futures Association, Interpretive Notice 9025 — Hypothetical Performance Results — Explains, within its regulatory scope, why hypothetical results do not fully reproduce liquidity, slippage and real financial risk.