Reading MAE and MFE: Letting Past Trades Suggest Where Stops and Targets Belong

[Shadow Trader]

Maximum adverse excursion records how far a trade moved against the entry before it closed, and maximum favorable excursion records how far it moved in favor. Logging both for every trade, in pips or in multiples of initial risk, turns a vague feeling about stops and targets into something that can be plotted.

A useful first chart puts MAE on one axis and final result on the other, with winners and losers marked separately. If winning trades rarely went more than a small distance against the entry while losers pushed far beyond that distance, the zone between the two clusters suggests where a stop is merely adding loss rather than giving a valid idea room. Reversed patterns, where many eventual winners dipped deeply first, hint that the stop is too tight.

MFE answers the mirror question. When many losing trades first moved well in favor, the exit plan may be surrendering open profit. When winners routinely run far past the target, the target may be capping the edge.

Caution matters. Excursion data describes only the trades that were taken, so changing a stop alters later paths. Samples should be large enough that a few outliers do not set the threshold, and any adjustment is best tested on fresh trades before it replaces the old rule.