Mixed MAE and MFE Review on Five Trades

[Fairman]

Mixed MAE and MFE Review on Five Trades

Five trades with their final result and maximum favorable excursion, both in R. Trade 1: final plus 1.0, MFE 2.5. Trade 2: final minus 1.0, MFE 1.8. Trade 3: final plus 2.0, MFE 2.1. Trade 4: final minus 1.0, MFE 0.2. Trade 5: final plus 0.5, MFE 1.5.

Compute the share of MFE captured on trades with a positive MFE. Trade 1: 1.0 divided by 2.5, 40 percent. Trade 3: 2.0 divided by 2.1, 95 percent. Trade 5: 0.5 divided by 1.5, 33 percent. Trade 2 captured negative profit: it was up 1.8R and ended at minus 1.0R, giving back 2.8R. Trade 4 never reached the profit zone.

The standout is trade 2. A trade that reached 1.8R and then lost the full stop is a management failure, or at least a candidate for a rule: move the stop to breakeven after 1R, take partial profit at 1.5R, or trail.

What would a breakeven rule have done? Trade 2 would have exited at about zero, a gain of 1R versus actual. But trade 1, which probably pulled back before reaching 2.5R, might have been stopped at breakeven, losing 1R of its final profit, and trade 5 might have been stopped at zero instead of plus 0.5.

Net effect on the five: trade 2 gains 1.0R, trade 5 loses 0.5R, trade 1 depends on whether it pulled back to the entry.

Five trades prove nothing. The method matters: look at the winners that gave back and the losers that were once winners.

Exercise: list your trades that reached 1R and ended as losses, and count them.