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Maximize Your Profits with Maximum Favourable Excursion and Maximum Adverse Excursion in Trading Vault
Forex trading can be a profitable venture, but it's not without risks. One way to minimize those risks and maximize your profits is to use the concepts of Maximum Favourable Excursion (MFE) and Maximum Adverse Excursion (MAE). In this post, we'll define these terms, explain how they work, and provide some tips on how to use them effectively in your trading strategy.
What is Maximum Favourable Excursion (MFE)?
MFE is the largest profit that could have been made on a trade if it had been closed at the optimal time. For long (short) trades, it measures the distance between the entry price and the highest (lowest) point the trade reached before reversing, also known as Maximum Favourable Price (MFP). In other words, it's the maximum profit you could have made on a trade before it started going against you.
Using MFE in your trading strategy allows you to set realistic profit targets and avoid exiting a trade too early. By identifying the optimal point to close a trade, you can maximize your profits and reduce your risk.
What is Maximum Adverse Excursion (MAE)?
MAE is the largest loss that could have occurred on a trade if it had been closed at the worst possible time. For long (short) trades, it measures the distance between the entry price and the lowest (highest) point the trade reached before reversing, also known as Maximum Adverse Price (MAP). In other words, it's the maximum loss you could have experienced on a trade before it started going in your favour.
Using MAE in your trading strategy allows you to set realistic stop losses. By identifying the optimal point to close a trade, you can maximize your profits and reduce your risk.
Available Trade Range (ATR): Difference between MFP and MAP.
End Trade Drawdown (ETD): Difference between MFP and close price.
Remaining Distance to Target (RDT): Difference between MFP and target price.
Remaining Distance to Stop (RDS): Difference between MAP and stop price.
How can MFE and MAE help you in trading?
By monitoring your MFE and MAE, you can gain insights into the effectiveness of your trading strategy. For example, if you consistently see trades that reach a high MFE but then reverse and result in a loss, it may be an indication that you need to adjust your exit strategy. Alternatively, if you see trades with a low MAE but ultimately result in a profit, it may be an indication that you could tighten your stop loss to maximize your reward-to-risk ratio.
With the trade performance graph located on the stats pages of Trading Vault, you can easily visualize your trades' Maximum Favourable Excursion (MFE) and Maximum Adverse Excursion (MAE), as well as other pertinent statistics such as entry and exit efficiency, available trade range, end trade drawdown, remaining distance to target, and remaining distance to stop. By clicking on any specific statistic, you can view it displayed on the graph.
Pro tip: When analyzing MFE, filter your trades to only view the losers, and when analyzing MAE, filter to only view the winners. This way, you can better understand your performance in each specific scenario.
How to use MFE
To effectively use Maximum Favourable Excursion (MFE), analyze your last 30-60 losing trades, and determine the MFE that 70-80% of them did not surpass. By reducing your take-profit level to be at this MFE, you can maximise your profits by minimizing the chance of profitable trades turning around to hit your stop loss and becoming losers.
How to use MAE
To effectively use Maximum Adverse Excursion (MAE), analyze your last 30-60 winning trades, and determine the MAE that 70-80% of them did not surpass. By reducing your stop loss to be at this MAE, you can increase the reward-to-risk ratio of your trades and generate larger profits on 80% of your trades. This can outweigh additional losses that may occur the other 20% of the time from having your stop too tight.
Recording MFE and MAE in Trading Vault
Using Trading Vault, you can easily record your MFP and MAP, allowing the app to automatically calculate your MFE and MAE for each trade. This information can be incredibly valuable for analyzing your performance and identifying areas for improvement.
The 'Trade Performance' widget on the Stats page shows all your trades to help you visualise your performance and analyse your trading strategy effectively. Select any stat in the widget to view it on the graph. If a particular trade stands out, you can click it within the graph to load that trade for a more detailed analysis.
Q: How do I calculate MFE and MAE?
A: You can use Trading Vault to calculate MFE and MAE automatically. Simply enter the entry price, the stop-loss level, the take-profit level, the maximum adverse price (MAP) and maximum favourable price (MFP), and the app will calculate MFE and MAE for you.
Q: What's the difference between MFE and MAE?
A: MFE measures the largest profit that could have been made on a trade, while MAE measures the largest loss that could have occurred on a trade.
Q: Can I use MFE and MAE in all types of trading?
A: Yes, MFE and MAE can be used in all types of trading, including forex, stocks, and futures.
Q: How do I use MFE and MAE in combination with other trading strategies?
A: MFE and MAE can be used in combination with other trading strategies, such as technical analysis and fundamental analysis. By incorporating MFE and MAE into your overall trading strategy, you can increase your chances of success and reduce your risk.
Q: What is the MAP & MFP if the trade goes straight to my stop loss after entering?
A: If the trade goes straight to your stop loss, the MAP would be the same as your stop loss, and the MFP would be your entry price.
Using MFE and MAE can be a powerful tool in your trading strategy. By understanding these concepts and incorporating them into your trading plan, you can set realistic profit targets, limit your losses, and maximize your profits. Remember to always use proper risk management techniques and never risk more than you can afford to lose. With these tips in mind, you'll be well on your way to becoming a successful forex trader.