In this post, I'm going to break down MFE and MAE, show you where you can get these metrics, and how to use them to improve your trading.
Note: I favor using multiple of risk, instead of pips or dollar amounts, when measuring these metrics. So I'll add a “R” to the end of some of these names to tell you that I'm using the risk multiple.
If you had a 50 pip stop loss on a trade, and you made 100 pips on that trade, then you would make +2R. In my opinion, this is a much more useful way to measure your results because it's relative to your stop loss.
Measuring results by dollar amounts or pips does not take into account how much you risked to achieve a result.
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What MFE and MAE Stand For
Maximum Favorable Excursion (MFE)
The maximum amount of profit that was available while a trade was open.
Maximum Adverse Excursion (MAE)
The maximum amount of loss that was available while a trade was open.
Here's an example of MAE/MFE on a chart. I also threw in MaxR, which I'll explain later in this post.
How They Can Improve Your Trading
There are two ways that MAE and MFE can be used to improve your trading results.
Leave Less Profit on the Table
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.
For example, let's say that you have 100 trades and your average profit is 1.4R. But when you look at your average MFEP on these trades, it's 2.6R.
This might mean that you can move your profit targets to 2R to capture more profits on your winning trades.
MFE can help on losing trades too. Let's say that the average MFER on your losers is 1R. 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.
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.
Whatever the case may be, your average MFE could give you clues on how to leave less profit on the table.
Tune Your Stop Losses
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. This is an easy red flag to spot and a habit that can be easy to fix.
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. For the most part, you should only be moving your stop in a positive direction. Tracking MAER on all your trades will alert you to this issue, so you can improve your trading habits.
Second, if your MAER on winning trades is consistently less than 1R, you can explore the idea of tightening up your stop loss. 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.
A decrease in stop loss would also improve your returns, even if you use the same take profit levels.
Warnings When Using MAE and MFE
Trading metrics can help you dramatically improve your trading, but also you have to understand their limitations. So let's take a look at a couple of things that you should be aware of when using MAE and MFE.
Have a Significant Sample Size
First, you need to be sure that you have a significant number of trades before you start making changes to your trading strategy. If you have a strategy that doesn't produce frequent trading signals, then you should look for a minimum of 30 trades. Ideally, you would have at least 100 trades before you start making any decisions, but that's not always possible.
What Happens Afterwards Matters Too
Second, one thing that these metrics don't show you is what happens after your trades are closed. This is why I started using MaxR with MFE and MAE.
In order to improve the profitability of a trading strategy, you can either reduce the stop loss, or increase the take profit. It's generally easier to increase the take profit level, and using MaxR can help you do that. MFE won't help you unless you are closing your trades way too late. Even then, you might be able to squeeze a little more out of your trades by using MaxR instead of MFE.
Use the Right Type of MAE and MFE
Finally, be sure to measure MAE and MFE in a way that actually helps you. As I mentioned before, these metrics can be measured in different ways:
- $ per share (stocks)
- Total $ per trade
- Multiple of risk
If you only trade one market, then pips or $ per share is fine. For example, if you only trade the EURUSD or just the S&P500 E-mini, then you are comparing apples to apples when doing your trade analysis.
However, if you trade multiple currency pairs, then 10 pips in the EURUSD won't be an accurate comparison to 10 pips in the GBPJPY because the GBPJPY is much more volatile. Similarly, a total MFE of $25 in Apple stock can't be compared to a $25 MFE in USDCHF because they are two totally different markets, with different volatility and commission structures.
When you use the same trading strategy across multiple markets and currency pairs, the most accurate way to compare the results is by using P-ratio.
How to Get MFE and MAE
There are several different ways that you can get these metrics. Most trading journals like MyFxBook will give you MFE and MAE.
But in my opinion, most trading journals don't display these metrics in a way that's useful.
For example, MyFxBook gives you these stats in pips. As I mentioned above, that works well if you only trade one pair, but if you trade multiple pairs, the information becomes less useful. Here's an example of the MyFxBook chart.
I don't know about you, but I've always had trouble understanding how this MAE (and similar MFE) graph can help me improve my trading results. If it works for you, then fantastic…use this graph.
But if you're like me and would prefer a more useful presentation of MAE and MFE, then try this next method.
Another way to get MAE and MFE is to simply record it yourself in a spreadsheet. I find it useful to record these stats in P-ratio format or MAEP/MFEP.
For long trades:
- MAEP: (MAE price – entry price) / (entry price – stop loss price)
- MFEP: (MFE price – entry price) / (entry price – stop loss price)
For short trades:
- MAEP: (entry price – MAE price) / (stop loss price – entry price)
- MFEP: (entry price – MFE price) / (stop loss price – entry price)
Then average your MAEP and MFEP and see what you discover. If you have at least 30 trades, you can start to think about making changes to your strategy.
Final Thoughts on MFE and MAE
So that's how to use MFE and MAE to improve your trading.
They may help you…they may not. It all depends on how well you are currently trading.
But if you have never analyzed these metrics before, they are certainly worth looking at. You might be surprised at what you discover.
What did you learn from analyzing your MFE and MAE? Leave a comment below and let us know…