When we trade, the price will frequently move against our position before reversing and moving in our favor, where we will likely make money. We may determine our maximum unfavorable excursion by looking at how far the price often moves against our position before moving in our favor. What does this signify, though, for trading?
The maximum adverse excursion (MAE) measures the greatest distance that the price has traveled against your position during a transaction before turning around and moving in your favor. You learn this over time by looking back on your trades to understand how the price typically responds when you enter a transaction. You can increase your trade entry and stop loss by being aware of the MAE on your transactions.
What is maximum adverse excursion?
The greatest price movement against your position during a trade before it began to move in your favor is referred to as the maximum adverse excursion, also known as the maximum drawdown of an open position. By analyzing your trades to determine how the price typically responds when you initiate a trade, you may calculate the MAE over a number of trades.
The minimum price your asset attained during a long trade and the maximum price during a short trade are displayed specifically by maximum adverse excursion. John Sweeny created the idea as a statistical framework for calculating drawdowns in an open trade, which can be used as a foundation for choosing the appropriate stop loss level.
Maximum Adverse Excursion (MAE)
The MAE, which indicates how much the price moved against you, is the greatest loss you have ever faced during a deal. For instance, a long trade with an entry price of $100 and a lowest price of $94 during the course of the trade had a $10 MAE; the MAE might be represented as 60% with a stop at $90.
The effectiveness of stop placement can be evaluated using the MAE measurement. A trader with a very low overall MAE may be able to use a tighter stop to raise their expectancy and the magnitude of their winning trades. However, since a tighter stop typically results in a larger loss rate, it is important to exercise caution while altering stop size.
Maximum Favorable Excursion (MFE)
The MFE measures the biggest observed profit during a trade and is the antithesis of the MAE. A high MFE on losing trades indicates that the price nearly reached the level at which profits were to be taken before turning and slamming into the stop loss. The trader may then enhance their strategy by employing somewhat more conservative profit objectives.
Once again, care must be taken when modifying order placement. A tighter strategy to profit-taking results in a lower expectancy. Thus, a trader must strike the correct balance between not diminishing their overall expectation while employing a lesser take profit level to prevent giving back earnings.
Conclusion
Maximum Adverse Excursion (MAE) is a crucial live-trade indicator that may be used to assess discretionary and automated trading platforms. The MAE enables you to reduce risk in order to optimize earnings by statistically assessing the course of your trades from the entry points to the exit points.
All things considered, the maximum adverse excursion is a crucial live-trade indicator that enables you to examine how your deals typically develop in order to identify solutions to reduce risk and increase earnings.
Professional traders recognize that their entrance does not make or break their trading approach, in contrast to most traders who only concentrate on developing “better” entry systems. Traders usually lose money due to poor trade management, inaccurate stop loss and take profit positioning, or both.
A trader’s approach can be better understood by the combination of reward-risk and R-multiple, as well as the live-trade metrics MAE and MAF, which can help him become an even better trader.
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