Assumption Execution at Next Day Market Open

Many algorithmic trading backtests assume that:

Orders are executed at the market open on the next trading day after the signal is generated.

This simplifies implementation and avoids lookahead bias. However, this assumption also requires careful validation.

It depends on several factors:

Order size relative to daily trading volume
If your trade size is small compared to the average daily volume, it's likely that you can execute at or near the opening price with minimal market impact.
Market liquidity
In highly liquid markets (e.g., major ETFs or large-cap stocks), opening price execution is a reasonable approximation.
Order type
Market orders might fill immediately, but with slippage. Limit orders may not fill at all.
Volatility at market open
Some assets experience high volatility right after the market opens, making this approximation less accurate.

To test this assumption:

Compare your backtest results against paper trading using a broker like Alpaca.
Log actual fill prices from paper trades and compare them with assumed open prices in your simulation.
Monitor fill success rate for limit orders and the slippage for market orders.

Alpaca’s paper trading environment is useful but has limitations:

Feature	Alpaca Paper Trading
Market order execution	Always fills, at simulated prices
Limit order realism	May fill unrealistically
Slippage / liquidity model	Not modeled accurately
Market impact simulation	❌ Not supported

Therefore:

Alpaca paper trading is helpful for functional testing but not reliable for execution realism.

To improve simulation fidelity, consider:

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