Reddit Discussed Intraday Trading Bot Backtest Flaws and Real-World Limitations

This analysis is based on a Reddit discussion [0] where a user (OP) presented a backtested intraday trading bot. The bot’s backtest claimed ~$930 in profits on a $3,000 initial investment over a month, with a Sharpe ratio of 0.45. OP stated the bot trades at the bid price to avoid bid-ask spreads and uses a commission-free broker.

A key critique from the discussion centers on market mechanics: buying at the bid price is fundamentally impossible. According to market structure principles, the bid price represents the highest price a buyer is willing to pay, while the ask price is the lowest price a seller accepts—with the bid always lower than the ask [1][3]. This means buyers cannot purchase assets below the ask price, so OP’s backtest incorrectly assumes fills at unavailable prices, artificially inflating profitability.

Additionally, the backtest ignores critical real-world factors: slippage (the difference between expected and actual fill prices due to volatility and liquidity) and order book depth (which affects fill quality and speed) [4]. These omissions lead to unrealistic performance estimates, as live markets rarely provide 100% fills at exact desired prices.

The reported Sharpe ratio of 0.45 is also relatively low for an intraday strategy. The Sharpe ratio measures risk-adjusted returns, with values above 1.0 typically considered good for short-term trading strategies [0]. A ratio below 0.5 may not compensate for the high risks associated with intraday trading.

1. Flawed Market Mechanics Assumption
   : The claim of buying at the bid price invalidates core backtest assumptions, as this is not possible in live markets. This error alone would increase transaction costs beyond the backtest’s estimates.
2. Backtesting Limitations Drive Discrepancies
   : Ignoring slippage and order book depth is a common pitfall that leads to overstated backtest results. Realistic simulations of these factors are essential to validate strategy viability.
3. Risk-Adjusted Performance Is Suboptimal
   : A Sharpe ratio of 0.45 suggests the strategy’s risk-adjusted returns are insufficient for intraday trading, where high volatility and transaction costs require stronger performance to generate consistent profits.

• Risks
  : If OP proceeds with live testing without addressing the identified flaws, they face significant risks of underperformance or losses due to unaccounted spread costs, slippage, and poor fill quality [0].
• Opportunities
  : Improving the backtest with realistic slippage models, order book depth simulations, and correcting market mechanics assumptions can provide a more accurate picture of the strategy’s potential. Starting with a small live investment after these adjustments can help mitigate risk.

• Market Mechanics Basics
  : Bid = highest buyer offer; ask = lowest seller price; buyers always pay at or above the ask, sellers receive at or below the bid.
• Backtesting Best Practices
  : Must include slippage, fill rates, order book depth, and realistic transaction costs to reflect live market conditions.
• Sharpe Ratio Context
  : Intraday strategies typically need Sharpe ratios above 1.0 to be considered good risk-adjusted performers.
• Live Trading Advice
  : Always validate strategies with realistic simulations before deploying real capital, and start with small positions to manage risk.

[0] Reddit discussion on trading bot backtest (original content)
[1] Nasdaq - Bid Price and Ask Price
[3] Studocu - Financial Investment Y3S1 Chapter 2: Securities Market Transactions
[4] Enlightened Stock Trading - RealTest VS MetaTrader-4: Best Backtesting Software for Traders