Monitoring Strategies
Active monitoring is critical for successful paper trading. Learn how to track strategy performance in real-time, analyze equity curves, review trade logs, identify issues early, and make data-driven decisions about your trading strategies.
Why Monitor Paper Trading?
Paper trading with live market data can reveal issues that backtests miss: implementation bugs, data delays, unexpected market conditions, or flawed logic. Active monitoring helps you catch problems early and build confidence before live trading.
Equity Curves
The equity curve is your most important monitoring tool - a visual representation of account value over time:
Understanding Equity Curves
The equity curve plots your account balance over time. Each point represents your total portfolio value (cash + open positions) at that moment.
Pro Tip: Compare your live equity curve to your backtest equity curve. They should have similar shapes and slopes. Large divergences indicate issues with strategy implementation or changed market conditions.
Key Monitoring Metrics
Track these metrics daily to assess strategy health:
Current Balance
Total account value including cash and open positions. Should generally trend upward over time for profitable strategies.
Total P&L
Cumulative profit or loss since account creation. Absolute dollar amount and percentage return from initial balance.
Daily P&L
Profit or loss for today. Helps identify unusual single-day performance that might indicate issues or opportunities.
Open Positions
Number and value of current positions. Monitor size relative to account balance and ensure positions align with strategy logic.
Active Strategies
Number of running strategies. Ensure all expected strategies show "Running" status, not "Stopped" or "Error".
Recent Trades
Latest executed trades with timestamps, prices, and sizes. Verify trades make sense given current market conditions.
Trade Logs & History
Detailed trade logs provide insights into strategy behavior:
Analyzing Trade Logs
Each trade entry includes:
- Timestamp: Exact time trade was executed
- Symbol: Trading pair (e.g., BTCUSDT)
- Side: Buy or Sell
- Price: Execution price
- Quantity: Amount traded
- Value: Total trade value (price × quantity)
- Strategy: Which strategy triggered the trade
- Reason: Entry or exit signal that triggered trade
What to Look For: Confirm trades match your strategy logic. Look for unexpected patterns like too-frequent trading, trades at odd times, or unusual quantities.
Performance Tracking
Compare real-time performance against backtest expectations:
Returns vs. Backtest
Your paper trading returns should roughly align with backtest results over similar time periods. Small differences (5-10%) are normal due to market conditions. Large divergences (>20%) indicate problems.
Trade Frequency
Count trades per day/week. Should match backtest frequency. Much higher = over-trading or signal bugs. Much lower = conditions not met or strategy not executing.
Win Rate Tracking
Calculate percentage of profitable trades. Compare to backtest win rate. Significant differences suggest implementation issues or market regime changes.
Drawdown Monitoring
Track current drawdown from peak balance. If it exceeds backtest max drawdown significantly, consider stopping the strategy and investigating.
Alerts & Warning Signs
Watch for these warning signs that indicate strategy issues:
Strategy Status: "Error"
Strategy encountered a critical error and stopped automatically. Possible causes: invalid strategy logic, feature calculation failure, database connection lost, or worker crash.
Action: Check logs, verify strategy structure, restart strategy. If error persists, re-backtest to validate strategy.
Drawdown Exceeds Backtest
Current drawdown is larger than the maximum drawdown seen in backtesting. This suggests strategy is performing worse than expected.
Action: Stop strategy immediately. Analyze recent trades for anomalies. Review market conditions for regime changes. Consider re-optimizing or retiring strategy.
No Trades for Extended Period
Strategy hasn't executed trades in days/weeks despite showing "Running" status. Could indicate conditions not met, data feed issues, or logic errors.
Action: Review current market data and verify entry conditions. Check if backtest also had dry periods. Ensure data feed is working. This may be normal for infrequent strategies.
Excessive Trade Frequency
Strategy is trading much more frequently than in backtests. Can lead to high costs in live trading and indicates possible signal bugs.
Action: Stop strategy and review logic. Check for conditions that trigger too easily or features that are too noisy. Adjust thresholds or add filters.
Win Rate Significantly Lower
Win rate in paper trading is much lower than backtest (e.g., 30% vs. 55%). Suggests over-fitted backtest or implementation errors.
Action: Analyze losing trades for patterns. Check for look-ahead bias in backtest. Verify feature calculations match. May need to rethink strategy entirely.
Daily Monitoring Routine
Establish a consistent monitoring routine:
Recommended Daily Checklist
- Check Strategy Status: Verify all strategies show "Running" not "Error" or "Stopped"
- Review Equity Curve: Look for unusual spikes, drops, or pattern changes
- Check Daily P&L: Note if today was profitable or losing, magnitude of change
- Review Recent Trades: Scan last 24 hours of trades for unexpected behavior
- Monitor Open Positions: Verify positions align with strategy and aren't oversized
- Compare to Backtest: Mental check - does performance align with expectations?
- Document Observations: Keep notes on unusual events, market conditions, or concerns
Time Investment: Daily monitoring should take 5-10 minutes for 1-3 strategies, 15-20 minutes for larger portfolios. Don't skip days - consistency is key to catching issues early.
Weekly Deep Dive
In addition to daily checks, perform a deeper analysis weekly:
Weekly Review Checklist
- Calculate Performance Metrics: Sharpe ratio, max drawdown, win rate over the past week
- Trade-by-Trade Analysis: Review all trades for the week, identify winners/losers and patterns
- Compare vs. Backtest Trajectory: Plot paper trading equity curve against backtest curve for same timeframe
- Identify Best/Worst Days: Understand what caused outlier performance days
- Market Regime Assessment: Note current market conditions (trending, ranging, volatile, calm) and strategy suitability
- Decide on Adjustments: Keep running, stop, modify parameters, or deploy to more capital
When to Stop a Strategy
Know when to pull the plug on underperforming strategies:
Stop Criteria
- Drawdown Exceeds 1.5x Backtest Max Drawdown: Strategy is performing significantly worse than expected
- Consistent Underperformance for 2+ Weeks: Daily/weekly returns consistently below backtest expectations
- Sharpe Ratio Below 0.5: Risk-adjusted returns are too low to justify continuing
- Implementation Errors Detected: Logic bugs, feature calculation issues, or data problems discovered
- Market Regime Change: Clear shift in market conditions that strategy isn't designed for
- Personal Discomfort: If you don't trust the strategy or can't sleep at night, stop it
Monitoring Best Practices
Set Alerts
Configure notifications for critical events: strategy errors, large drawdowns, unusual trade volumes. Don't rely on manual checks alone.
Keep a Trading Journal
Document observations, decisions, and lessons learned. Note market conditions, strategy changes, and reasoning. This becomes invaluable over time.
Don't Over-monitor
Checking every hour creates stress and leads to impulsive decisions. Stick to daily checks with weekly deep dives. Trust your strategy.
Be Patient
Paper trade for at least 2-4 weeks (ideally 2-3 months) before judging strategy viability. Short-term noise doesn't reflect long-term performance.
Understand Normal Variance
Not every day will be profitable. Drawdowns happen even to good strategies. Focus on long-term trends, not daily fluctuations.