Simulated trading with fake money on real prices, used to practice execution and test rules without risk.
Paper trading is useful for learning a platform and checking that a strategy's rules are executable in real time. It is less useful for judging expectancy because fills are optimistic and the emotions of real loss are absent.
A common path is backtesting, then paper trading, then very small live size. The jump from paper to live is where most people discover that psychology-driven mistakes were hiding.
Example: a trader paper-trades a strategy for two months at +0.6R per trade, then goes live at 0.25% risk. Live results run +0.3R for the first 50 trades, mostly from hesitation on entries and early exits.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.
Educational only, not advice. Spotted an error? Post in Site Feedback.