Maximum Adverse Excursion and Maximum Favorable Excursion

Maximum Adverse Excursion (MAE) and Maximum Favorable Excursion (MFE) are trading concepts first developed by John Sweeney in 1985, and later popularized in his 1997 book Maximum Adverse Excursion: Analysing Price Fluctuations for Trading Management (see box below).

The Maximum Adverse Excursion is the maximum amount the price goes against you whilst in a trade, i.e. the lowest low. The Maximum Favorable Excursion is the maximum amount the price goes in your favor whilst in a trade, i.e. the highest high.

The MAE can be very useful in setting stops, and the MFE can help set optimal profit targets. When you are backtesting your proposed system, first assume that you will place very wide stops and profit targets, and be sure to record the MAE and MFE for the trade, in addition to the final profit. You will then have all the data you need to review and select the best stop and profit target levels.

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Maximum Adverse Excursion: Analysing Price Fluctuations for Trading Management - John Sweeney

Maximum Adverse Excursion (MAE) replaces emotionally-biased guesswork with statistical calculations that enable traders to quantitatively define the loss point. Using MAE, they can pinpoint the amount of any potential loss before they implement their trading decisions, thus avoiding nasty surprises. The inventor of MAE provides all the tools and guidance--including computer programs--traders need to create personalized charts that measure market behavior, determine the specific capital requirements for every trade, and help better manage day-to-day investment risks.