MaxR vs MFE: Why You Need Both

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 MaxR.

It's part of my Advanced Trading Metrics Tracking.

So in this post, I'll go over why you might want to track MaxR 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 MaxR…

Definition of MaxR

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 MaxR on the trade. The “R” stands for Multiple of Risk or the result of the trade, relative to your stop loss.

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.

MaxR 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.

MaxR 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 MaxR level, or is exit B the correct MaxR 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 MaxR. 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 MaxR 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 MaxR level.

Here's a video explanation of MaxR…

How MaxR 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 MaxR in my trading journal and I noticed that over 90% of my winning trades had a MaxR of more than 2P.

Here's an example entry from my Evernote trading journal. The first number at the end of the line is my actual P result and second number is my MaxR.

So I started targeting at least 2P on every trade and it has worked out well ever since. With this strategy, there's rarely a time when I get less than 2P on a trade. Price usually either goes to at least 2P, 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 2P.

…but I probably wouldn't have known to do this if I didn't track my MaxR. 

The Dark Side of Tracking MaxR and MFE

The benefits of tracking MaxR 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 MaxR 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 50 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 50 trades. 

When in doubt, don't change your strategy. 

These metrics are helpful, but they don't always yield actionable results.

When to Track MaxR?

To get the full benefit of MaxR, 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:

• Live trades
• Demo trades
• Backtesting trades
• Missed trades

The more data points you have, the better your chances of spotting a way to improve your results. 

Conclusion

If you consistently see that your MFE and MaxR 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 MaxR on every trade and look for patterns in the data.

Also consider splitting up your trades into two parts. You can target your smallest MaxR number to lock in some profits on the first position. Then target a bigger multiple of risk 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 MaxR and find out if you're leaving money on the table.