Using MAE and MFE in trade strategies

T

torewy

Hey all,

Does anyone have any tips on how they use MAE and MFE figures that are gathered by backtesting? Trying to figure out a formula to help me set my stops and profit targets using my average MAE and MFE in a strategy for my winning and losing trades. And if there happen to be any online resources to help me come up with formulas that would help, I'm all ears. Many thanks.
 
torewy said:
Hey all,

Does anyone have any tips on how they use MAE and MFE figures that are gathered by backtesting? Trying to figure out a formula to help me set my stops and profit targets using my average MAE and MFE in a strategy for my winning and losing trades. And if there happen to be any online resources to help me come up with formulas that would help, I'm all ears. Many thanks.
More...




First thing, remember the "M" in the abbreviations stands for MAXIMUM.
And that max is based on only the data being looked at. Anything, which includes outliers, can and will occur.

IMO, the aggregated MAE/MFE over all your trades only tells if you
are taking trades that stand a chance... MFA greater than MAE.
You might need to do some math to get a usable answer... MFE/MAE is likely provided as prices. You want it expressed as an increment (or even money value) so you can determine HOW MUCH risk vs HOW MUCH reward.
Note: that doesn't mean you actually achieved that level of trading profiency.

To really benefit from MFE/MAE you need to, at minimum, look over a group of specific type of trades... A specific setup, a specific category (day, swing, investment), etc.

Even better would be doing the grunt work... MFE/MAE trade-by-trade and comparing that trade to the MFE/MAE of the specific grouping the trade belongs.

Here's a link to an article from one of the ET sponsors. Not sure it will be useful, but you never know when the next lightbulb will spark.

https://optimusfutures.com/tradeblog/archives/the-metrics-to-help-you-improve-your-trading


Good luck on your journey to MINIMUM risk and MAXIMUM reward.
 
Many thanks for the response. The MAE and MFE values I have are for one strategy (it's one I created in Trade-Ideas and then downloaded the spreadsheet). As mentioned, though, what to do with these figures is a question mark for me. I may also compare each figure to each ticker's ATR and/or 5- or 10-day range. Still thinking about it - and wish I was a math expert. I really appreciate your guidance!
 
It can be useful for developing (real-time) probabilities of a given trade type.

Also, once you know "max" it can be useful to re-calc using a stop LESS THAN the MAE!!
And re-calc with a target LESS THAN the MFE you can find if there is a near "guaranteed" target.
 
The MAE and MFE are important because they take the money management concept to a whole new level.

Here is an extreme example.

You notice that 100% of your winning trades add at least an extra 3% profit to your account.
You also notice that 100% of your losing trades never make 1% before hitting your stop.

These two statistics are priceless, because now you have THE perfect money making machine!

Why?

Because you just need to wait until the profit equals 1% (on paper) to place a trade and pocket a guaranteed 2% (you just eliminated all the losing trades).

So far the only book on that subject is this one : "Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management" by John Sweeney
 
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I would look carefully at frequency and probability of MAE-MFE. Work on finding the conditions correlated with the frequency and probability of MAE* and MFE*.

*Treat MAE-MFE as ranges or quartiles, not absolute values.
 
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