What it means
A paper trade records a trade as if it happened, while leaving your brokerage account untouched. You choose a stock, quantity, side and assumed execution price, then follow the position using later market prices. The result is hypothetical, even when the prices used for tracking come from the market.
Paper trading can be done in a spreadsheet or a trading simulator. It differs from backtesting, which applies a strategy to earlier historical data. A forward paper trade starts with a decision made now and records what happens afterward. Neither method establishes what a real order would have earned or cost.
How it is calculated
There is no single paper-trading formula. A basic simulated long-position profit or loss is:
Simulated P&L (US$) = shares × (assumed exit price − assumed entry price) − assumed costs
- Simulated P&L is the hypothetical dollar gain or loss.
- Shares is the number of shares in the simulated position.
- Assumed entry price is the price per share recorded for the hypothetical purchase.
- Assumed exit price is the price per share recorded for the hypothetical sale or valuation.
- Assumed costs are any simulated trading costs, in US dollars, included in the calculation. They may be set to zero, but doing so makes the result less representative of a real trade.
For a position that remains open, using a current market price as the assumed exit price gives an unrealized simulated result: no sale has occurred. A return percentage can be calculated by dividing simulated P&L by the assumed amount committed, but it depends on which costs and cash flows are included.
Worked example
Suppose, hypothetically, you record a paper purchase of 100 shares at US$20 per share.
- The assumed purchase value is
100 × US$20 = US$2,000. - Later, you record a hypothetical sale at US$22 per share, for
100 × US$22 = US$2,200. - If you assume US$10 in total trading costs, simulated P&L is
US$2,200 − US$2,000 − US$10 = US$190.
Without the assumed costs, the displayed gain would be US$200. Neither figure is a real trading result. A live purchase or sale might fill at a different price, only partially fill or not fill at all.
Why it matters before you trade
Paper trading gives you a way to document a decision and inspect its hypothetical outcome without committing money. Before a trade, it can help distinguish a planned entry, quantity and exit condition from a vague idea that is difficult to evaluate later.
Its main limitation is execution realism. A simulation that assumes every order fills instantly at the displayed price may omit the bid-ask spread, market impact, slippage and unfilled orders. It also removes the financial pressure of risking real money. Those differences matter when comparing a simulated result with what an actual broker order could have produced.
How PreTrAIde uses it
PreTrAIde provides pre-trade analysis for a basket of stocks before any order is placed. Its GO, NO-GO or MODIFY verdicts are decision support, not recommendations. After a verdict, the user can open a paper-trading simulation of the basket and follow how it would have performed. The simulator is available on every plan and uses no real money.
PreTrAIde does not receive, transmit or execute orders; users place any real trades themselves through their own broker. Separately, users can log trades they actually executed, partially executed or skipped, including real fill prices, in PreTrAIde Memory. A paper-trading outcome should not be confused with that record of actual activity.
Common mistakes
- Treating a simulated fill as guaranteed. A real order may have a different fill price, a partial fill or no fill.
- Ignoring costs. Omitting spreads and other execution costs can overstate hypothetical results.
- Confusing an open position with a completed trade. Marking a position to a current price produces an unrealized simulated result.
- Treating a paper result as a return forecast. It describes an assumed scenario or tracked hypothetical outcome, not future performance.
- Comparing unlike records. A simulated trade and an actual broker fill measure different things unless their timing, quantities, prices and costs are made comparable.