Introduction To Paper Trading | Backtesting Trading Strategies | Quantra Course
A quant fund manager + A HFT prop desk founder + A quant teacher = a session worth watching
On 9 April, we hosted Kelvin Foo, Dr Gaurav Raizada, and Vivek Krishnamoorthy for a workshop on Algorithmic Trading & Options Risk Management.
Watch the recording:
www.quantinsti.com/articles/algorithmic-trading-python-ai-options-risk-management-webinar/
.
. A quant fund manager + A HFT prop desk founder + A quant teacher = a session worth watching
On 9 April, we hosted Kelvin Foo, Dr Gaurav Raizada, and Vivek Krishnamoorthy for a workshop on Algorithmic Trading & Options Risk Management.
Watch the recording:
www.quantinsti.com/articles/algorithmic-trading-python-ai-options-risk-management-webinar/
.
. Backtesting Trading Strategies: https://quantra.quantinsti.com/course...
Welcome to this video on introduction to paper trading. After completing this video, you will understand the difference between backtesting and live trading and the need for paper trading. And what is paper trading?
John has backtested his strategy and is satisfied with his results. He tells Mary that he wants to start trading in the live markets. But Mary says wait! Are you sure you want
to directly trade live?
John says that it will be the same as backtesting, so he is prepared. But Mary cautions John
that in backtesting you don't have any limitations. If the backtest shows 30% drawdown but 400% returns, you will accept it. But in live trading, you have actual money on the line. And you might cut your losses if the strategy performance is down by 10%. Thus, going from theory to practice can be difficult. John asks Mary what he should do?
Mary says that there is a small step which few traders use, and that is paper trading. But what is paper trading?
In simple terms, you take a notepad and write down the list of stocks you would be interested in buying or selling. Depending on the current price, you will log the buy price when the strategy gives the buy signal. And sell these stocks when your strategy gives the sell signal.
For example, the strategy gave a buy signal for Tesla on 17 May at the close. Thus, you will note down the buy price as $674. Then the strategy gave the sell signal on 26 May. You will note down the sell price as $707. If you take the difference between them you would get the profit or loss, which is $33. Before digitisation, traders used this method and that is why it is called paper trading.
Today, you have various trading platforms and brokers that offer paper trading of your strategies. You can track your trades and see the profit and loss in real-time without having to monitor the markets. John asks Mary why do traders paper trade?
Mary says that one of the main reasons is confidence building. Paper trading shows how your strategy will perform in live markets without putting your hard-earned money. You can also check for any deployment issues of your strategy. In paper trading, you can check whether your orders are getting filled entirely and what is the slippage. Based on the performance, you can tweak the order filling parameters.
For example, in backtesting, you could place an order of hundred shares of Tesla at 700 and it is assumed as filled. But in paper trading, only 50 shares were bought at 700. 25 shares were bought at 700.5 and the rest were filled at 701. In this manner, paper trading helps you understand the impact of slippage.
You will also understand the stability in the performance of your strategy. If your backtested strategy had a Sharpe ratio of 1, then you will expect a similar Sharpe ratio with some deviation in paper trading. You can expect a Sharpe ratio of 0.9 to 1.0. If the Sharpe ratio in paper trading is very different then it is a red signal that something is wrong in the strategy.
Paper trading can also help uncover any inadvertent mistakes in backtesting. For example, if your strategy uses a data point in future to make trading decisions, it will not get noticed in backtesting. Such things won't be possible in paper trading.
Quantra is an online education portal that specializes in Algorithmic and Quantitative trading. Quantra offers various bite-sized, self-paced and interactive courses that are perfect for busy professionals, seeking implementable knowledge in this domain.
Find more info on - https://quantra.quantinsti.com/
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