AI Trading: Lesson Learned #111: Paper Trading Capital Must Be Realistic

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Lesson Learned #111: Paper Trading Capital Must Be Realistic

Date: January 7, 2026
Category: Strategy / Risk Management
Severity: CRITICAL
Source: CEO Insight

The Problem

Paper trading account was configured with $100,000 starting balance while real account target is $500 (growing to $5,000 by June 2026).

This 200x mismatch creates a fundamentally false simulation because:

Strategy Mismatch: Paper tests AMD $200 CSPs (needs $20k collateral) - impossible with real capital
False Confidence: 80% win rate on $100k means nothing when testing impossible strategies
Diversification Illusion: Paper holds 4-5 positions; real can hold 1-2 max

The Correct Approach

Paper trading capital should match next realistic milestone, not current capital:

Milestone	Target Date	Paper Capital	Valid Strategies
$500	Feb 2026	$500	F/SOFI $5 CSPs only
$1,000	Mar 2026	$1,000	INTC/BAC $10 CSPs
$5,000	Jun 2026	$5,000	Quality stocks $50 CSPs
$50,000	Future	$50,000	Full strategy suite

What's Wrong with Current $100k Paper

What Paper Tests	Collateral Needed	When Realistic?
AMD $200 CSP	$20,000	2+ years away
SPY $660 CSP	$66,000	Never (unrealistic)
INTC $35 CSP	$3,500	~6 months

Action Items

[ ] Reset Alpaca paper account to $5,000
[ ] Close current paper positions
[ ] Only test CSPs with strikes ≤ $50
[ ] Limit to 1-2 positions maximum
[ ] Re-run backtests with $5,000 starting capital

Key Insight

"Test strategies you'll ACTUALLY USE when you reach the next milestone, not strategies that require 200x more capital than you'll ever have."

The goal isn't to paper trade at current capital ($30) - that's too restrictive to learn anything useful. The goal is to paper trade at the next achievable tier ($5,000) to validate strategies before deploying real capital.