You want to increase your trading profitability…but where to begin?
Well, you could risk more per trade.
But that doesn't work for everyone.
Another way to do it is to let your profits run longer.
But how do you determine the best place to set your take profits?
That's not always easy to quantify.
A data-driven way to figure this out is to use the MaxR metric.
I'll explain it in this video. If you prefer the text version, it is provided below this video.
Note: This only helps if you have a strategy that is already consistently profitable and you want to explore if there is a way to increase your profit per trade.
If you don't have a profitable strategy yet, start with our guide on how to choose the right trading strategy for you and our backtesting guide.
MaxR Optimization Explained
MaxR measures your maximum theoretical profit on a trade, if you didn't move your stop loss or set a take profit.
This is the ultimate “what if” scenario and it can show you how much money you are potentially leaving on the table.
Let's take a look at MaxR on a chart…
If you went short at the first orange line at 1.21609, then you might have been happy with an easy 2R profit.
But you also would have missed out on all of the profit down to the second orange line (MaxR).
Now it's generally not a good idea to give into FOMO (fear of missing out).
However, in this case, it can be useful to measure these moves after your trade was closed out, to see how much profit you could have bagged on the trade.
Compile MaxR stats on your trades and you may start to see potential optimizations.
Let's say that you have been targeting a 1R profit target and have been winning about 60% of your trades.
If you look at the data however, targeting up to 2R would only lower your win rate by about 2%, but it would double your profit.
If you targeted 3R, you would still have a decent win rate and you would triple return on each trade.
Keep in mind that before you make any trading decisions, you should have a lot more trades than in this example.
…and you should backtest any changes, before trading them in your live account.
But this shows you how MaxR analysis can help you make more per trade.
MaxR is a metric that I came up with, but you can get a similar result by using Maximum Favorable Excursion (MFE).
You can find trading journals that show you MFE here.
How Do I Determine a Maximum Move?
Obviously, there is some discretion involved when determining the maximum move on each trade.
…and you will never be able to get anywhere near hitting the maximum profit on every trade.
But for the sake of MaxR analysis, there are two ways that you can determine your maximum move:
- Eyeball it (more for right-brain dominant traders): Take a look at the chart and ask yourself where you would have realistically closed the trade.
- Use a formula (more for left-brain dominant traders): You could say that you will get out of a trade if the trade retraces more than 2R. Or you can use a moving average or a X-bar trailing stop. Regardless of what you decide to use, keep it consistent.
If you really want to geek out about trading strategy optimization, consider reading this book, or learning how to code in Python.
So that's how MaxR can help you stretch your profits on every trade.
This is by no means a magic bullet.
You may compile the data and find that you already have the optimal exit point.
If this is the case, then great! Knowing this will give you more confidence in your strategy and make it less likely that you will suffer from FOMO.
It might even give you JOMO (joy of missing out) because you know you are already trading an optimal exit.
Give MaxR a try, you might be surprised at what you discover.
If you tried MaxR, what did you discover? Let us know in the comments below…
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