There are a lot of trading journals out there that give you MFE, or maximum favorable excursion. I've written about both MFE and MAE (maximum adverse excursion) in detail here, if you aren't familiar with the terms.
But there's one trading metric that I haven't seen in any trading journal.
…and it has helped me a lot.
I call it Max R.
It's part of my Advanced R-Multiple Tracking.
So in this post, I'll go over why you might want to track Max R and how it can be used with MFE, to help you improve your trading edge.
Definition of MFE
The maximum amount of money you could have made, while the trade was open.
MFE is very useful because it can help you see if you are doing any of the following:
- Letting your trades run longer than they should
- Not locking in profits quickly enough
- Setting your profit targets too far away
For example, this trade was stopped out shortly after entry. But the trade was in profit for some time before getting stopped out. The MFE is marked on the chart below.
If this happens to you a lot, then you should consider setting your profit target a little closer to your entry to capture more profits.
But MFE only measures your missed profit, while your trade was open.
That's very useful, but it's only half of the story.
This is why you also need Max R…
Definition of Max R
The maximum amount you could have made on a trade, during and after your trade, if you did not move your stop loss.
Essentially, you want to understand what the ideal scenario would have been on your trade, if you just left the trade alone.
For example, you may have initially been happy with the result of the trade below because it hit your take profit quickly.
But upon later review, you notice that you missed out on a ton of profit.
This was the Max R on the trade.
The MFE on this trade would have been 100% because it hit the profit target. MFE is a good stat to track, but it doesn't tell you how much profit you are missing out on after you close the trade.
Max R gives you this vital information. In this example the missed profits were quite significant.
Now there's a reason why most trading journal platforms don't include this information.
Max R can be very subjective, so it's hard to calculate automatically.
MFE and MAE are much easier to calculate.
For example, would you call exit A your Max R level, or is exit B the correct Max R level?
Well, that really depends on your trading strategy and personality. If you are a shorter term trader, then exit A would be used to determine your Max R. Longer term traders might opt to use exit B.
Also consider how much of a retracement you are willing to endure. Would you bail on a trade if price moved back to breakeven?
I think most people would. So in that case, you would measure your Max R before price moved back to breakeven.
The bottom line is to ask yourself if you would realistically leave a trade open for that long.
If yes, then that is your Max R level.
How Max R Has Helped Me
There is a trading strategy that I use, which I abbreviate CPD. People inside the TraderEvo Program know what that is.
But it doesn't matter what the actual strategy is. The point is that I was tracking Max R in my trading journal and I noticed that over 90% of my winning trades had a Max R of more than 2R.
Here's an example entry from my Evernote trading journal. The first R number at the end of the line is my actual R result and second number is my Max R.
So I started targeting at least 2R on every trade and it has worked out well ever since. With this strategy, there's rarely a time when I get less than 2R on a trade. Price usually either goes to at least 2R, or I get stopped out.
In the example above, I would have gained an extra 53.8% profit on the trade, by moving my take profit to 2R.
…but I probably wouldn't have known to do this if I didn't track my Max R.
The Dark Side of Tracking Max R and MFE
The benefits of tracking Max R and MFE are great, but there is also a potential downside.
There can be a tendency to continually adjust your exit points to try and optimize your Max R and MFE.
Precise optimization sounds like a great idea, but it's usually a recipe for disaster.
Don't fall down that rabbit hole.
Remember that trading is not black and white. It's shades of gray.
To avoid over-optimization, only review these stats after every 30 trades. Is there a clear trend, or are the results all over the place?
If there isn't a clear benefit to changing your trading strategy, then don't. Keep tracking though, you may need more trades to see a pattern.
Check back after another 30 trades.
When in doubt, don't change your strategy.
These metrics are helpful, but they don't always yield actionable results.
When to Track Max R?
To get the full benefit of Max R, I believe that you should track it on every trade you take.
If aren't familiar with the types of trades that I recommend tracking, they are:
The more data points you have, the better your chances of spotting a way to improve your results.
If you consistently see that your MFE and Max R are showing a good profit, but you fail to capitalize on a majority of these opportunities, then it might be time to rethink your exit strategy. Measure your Max R on every trade and look for patterns in the data.
Also consider splitting up your trades into two parts. You can target your smallest Max R number to lock in some profits on the first position. Then target a bigger R multiple to maximize your gains on the second position.
These simple stats can help you turn a breakeven strategy into a profitable one, and make an already profitable strategy even more profitable.
Track your Max R and find out if you're leaving money on the table.