{"id":7110,"date":"2013-06-25T05:18:22","date_gmt":"2013-06-25T12:18:22","guid":{"rendered":"http:\/\/www.tradingheroes.com\/?p=7110"},"modified":"2024-06-12T23:15:30","modified_gmt":"2024-06-13T06:15:30","slug":"mfe-mae-explained","status":"publish","type":"post","link":"https:\/\/www.tradingheroes.com\/mfe-mae-explained\/","title":{"rendered":"MFE and MAE Explained: How They Can Improve Your Trading"},"content":{"rendered":"

In this post, I'm going to break down MFE <\/strong>and MAE<\/strong>, show you where you can get these metrics, and how to use them to improve your trading.<\/p>\n

Note: I favor using multiple of risk, instead of pips or dollar amounts, when measuring these metrics.<\/strong> So I'll add a “R” to the end of some of these names to tell you that I'm using the risk multiple.<\/p>\n

If you had a 50 pip stop loss on a trade, and you made 100 pips on that trade, then you would make +2R.<\/p>\n

In my opinion, this is a much more useful way to measure your results because it's relative to your stop loss.<\/p>\n

Measuring results by dollar amounts or pips does not take into account how much you risked to achieve a result.<\/p>\n[toc]\n

What MFE and MAE Stand For<\/h2>\n

Maximum Favorable Excursion (MFE)<\/h3>\n

The maximum amount of profit<\/strong> that was available while a trade was open.<\/p>\n

Maximum Adverse Excursion (MAE)<\/h3>\n

The maximum amount of loss<\/strong> that was available while a trade was open.<\/p>\n

Example<\/h3>\n

Here's an example of MAE\/MFE on a chart. I also threw in MaxR, which I'll explain later in this post.<\/p>\n

\"MFE<\/p>\n

How They Can Improve Your Trading<\/h2>\n

There are two ways that MAE and MFE can be used to improve your trading results.<\/p>\n

Leave Less Profit on the Table<\/h3>\n

If you notice that your average MFE is significantly better than the average result of your trades, then you are leaving profits on the table.<\/p>\n

For example, let's say that you have 100 trades and your average profit is 1.4R.<\/p>\n

But when you look at your average MFEP on these trades, it's 2.6R.<\/p>\n

This might mean that you can move your profit targets to 2R to capture more profits on your winning trades.<\/p>\n

MFE can help on losing trades too. Let's say that the average MFER on your losers is 1R.<\/p>\n

This means that there are probably quite a few trades where you could have had a nice profit, but for some reason, you took a loss.<\/p>\n

It could be a function of your trading strategy, but it could also mean that you are closing your trades out too late and are missing the most profitable part of the move.<\/p>\n

Whatever the case may be, your average MFE could give you clues on how to leave less profit on the table.<\/p>\n

Tune Your Stop Losses<\/h3>\n

First of all, if the average MAER of your trades is more than about 1.1R (accounting for slippage), then you're probably moving your stop loss in a negative direction, after you enter the trade.<\/strong><\/p>\n

This is an easy red flag to spot and a habit that can be easy to fix.<\/p>\n

Now, there may be profitable trading strategies were you need to move your stop loss in a negative direction, but I've never seen one.<\/p>\n

For the most part, you should only be moving your stop in a positive direction.<\/p>\n

Tracking MAER on all your trades will alert you to this issue, so you can improve your trading habits.<\/p>\n

Second, if your MAER on winning trades is consistently less than 1R, you can explore the idea of tightening up your stop loss.<\/strong><\/p>\n

For example, if your MAER on winning trades is -0.22R, then you may be able to cut your stop loss in half and still get good results.<\/p>\n

A decrease in stop loss would also improve your returns, even if you use the same take profit levels.<\/p>\n

To get MAE and MFE stats for your trading check out these trading journal solutions<\/a>.<\/p>\n

Warnings When Using MAE and MFE<\/h2>\n

Trading metrics can help you dramatically improve your trading, but also you have to understand their limitations.<\/p>\n

So let's take a look at a couple of things that you should be aware of when using MAE and MFE.<\/p>\n

Have a Significant Sample Size<\/h3>\n

\"Large<\/p>\n

First, you need to be sure that you have a significant number of trades before you start making changes to your trading strategy.<\/strong><\/p>\n

If you have a strategy that doesn't produce frequent trading signals, then you should look for a minimum of 30 trades.<\/p>\n

Ideally, you would have at least 100 trades before you start making any decisions, but that's not always possible.<\/p>\n

You can get more data by backtesting<\/a> or beta trading<\/a>.<\/p>\n

This will allow you to build up the number of trades<\/a> that you examine and allow you to make more informed choices.<\/p>\n

What Happens Afterwards Matters Too<\/h3>\n

Second, one thing that these metrics don't show you is what happens after<\/em> your trades are closed.<\/strong><\/p>\n

This is why I started using MaxR<\/a> with MFE and MAE.<\/p>\n

In order to improve the profitability of a trading strategy, you can either reduce the stop loss, or increase the take profit.<\/p>\n

It's generally easier to increase the take profit level, and using MaxR can help you do that.<\/p>\n

MFE won't help you unless you are closing your trades way too late.<\/p>\n

Even then, you might be able to squeeze a little more out of your trades by using MaxR instead of MFE.<\/p>\n

Use the Right Type of MAE and MFE<\/h3>\n

Finally, be sure to measure MAE and MFE in a way that actually helps you.<\/strong><\/p>\n

As I mentioned before, these metrics can be measured in different ways:<\/p>\n