"Why Your Paper Trading Backtests Are Lying to You (And How to Fix It)"

Why Your Paper Trading Backtests Are Lying to You (And How to Fix It) You ran the backtest. The Sharpe ratio looks great. CAGR of 34%. Max drawdown a reasonable 12%. You switch to paper trading and watch your strategy bleed out over the next two weeks. If this sounds familiar, you're not doing anything wrong. Backtests lie by design — and paper trading in isolation doesn't fix the problem. Here's what's actually happening, and a better way to evaluate strategies before you put real capital on the line. Problem 1: Survivorship Bias in Your Data If you're testing against S&P 500 constituents, you're testing against today's winners. The companies that went bankrupt, got delisted, or dropped out of the index over your test period aren't in your dataset. This matters more than people realize. A strategy that "buys the dip on large-caps" looks spectacular if you're only testing on companies that survived. In reality, buying dips on Lehman Brothers in 2008 was a one-way ticket to zero. Th