Simulating real world order fills for paper trading

You must simulate accurate price and volume liquidity.

A fill is the actual execution of your order. What we want to do is make it slightly harder for you to be filled while you are paper trading. No easy instantaneous executions. Of course, if you send a market order you may be filled quickly, but unless the stock is liquid you may not get the execution price you want. So we will be working under the assumption that all your orders are limit orders.

After or while executing a paper trade order placement you should have a one-minute chart up of your stock. (We are assuming you are using real-time stock charting). Using delayed data can work for individuals who are more investor minded or swing-trader oriented. Regardless, you need to pull up the one-minute chart.

Note: For those with access to Level II quotes or price and volume data you are in better shape and just remember to follow the 5x rule for volume. If 5x shares are offered for sale at your price and you send your order you should also wait 10 seconds and if the offer is still up after that you can go ahead and fill yourself. This is because in the real world you may see an offer to buy or sell on Level II quotes and as soon as you place your order it disappears from the screen and you do not get filled.

Action:

Make note of the price and volume of your stock on the one minute chart when you press enter to send your order. If the stock price falls below your order price (by a minimum of a penny) AND 5x (five times) your order volume is traded below your order price you may fill your order. This is if you are buying. If you are shorting the opposite is true. The stock price must rise at least a penny above your order price AND 5x (five times) your order volume has to trade above your order price.

Note: You can give yourself a partial fill (1/2 your order) if 3x (three times) the volume of your order trades. Otherwise, do not fill your order.

High Volume Stocks

If you trade on the Nasdaq and in liquid stocks, you do not have to be so stringent. For example, Intel (INTC) trades over 50k to 100k shares per minute on average. If you are buying only 200 shares, you know 5x that amount will trade. You can fill yourself right away.

Low to Medium Volume Stocks

This is where you want to tighten up the rules and make sure you not only have the price but the volume to give yourself a fill. Having the volume for your trade is 50% of the fill. It is otherwise overlooked on many trading simulators. You need the volume. You can't buy 1000 shares of a stock at the price you want when only 500 shares traded in the last minute at that price. These rules apply especially to stocks on the NYSE or AMEX.

If you follow these rules you will be well on your way to simulating real world order fills on the exchanges.