How far the price has gone against you is quantified by the MAE concept. The individual trades of your systems can also be evaluated using MAE in order to ascertain the dollar or percentage amount at which you would fix your protective stop. We can say that he effectiveness of stop placement can be analysed using MAE.

The size of a trader winning trades by using a tighter stop and the trader’s expectancy can be enhanced by an extremely low overall MAE. However, since a closer stop could lead to a higher loss rate, the stop size must be carefully adjusted. MAE is calculated with the difference between the lowest low (highest high) ever witnessed during the trade and the entry price, for long (short) trades. For example – let us assume you take a long position on a security at 30 dollars. And the securities’ price dropped to 10 dollars after that and finally climbed to 40 dollars before the trade closed. Therefore, the MAE or the Maximum Adverse Excursion for this winning trade would be 20 dollars or the difference between 30 dollars and 10 dollars. The MAE is zero if the price of a short trade is generally lower than the price at the entry point throughout the trade’s duration, or if the price of a long trade is usually higher than the entry point price throughout the trade’s duration.

From the biased conjecture to statistical calculations, the Maximum Adverse Excursion or MAE is diverse so that traders can quantitatively define the loss point. The amount of any potential loss before acting on their trading decisions can be highlighted by MAE. In order to review various trading system, traders can use Maximum Adverse Excursion or MAE, be it automated or discretionary.

For profit targets, stop loss, and mechanical trading systems with specific entry, the MAE methodology is best suited. To use with this methodology, conventionally, stop and reverse or SAR is the best system. There are some other vital areas where MAE can help you get the most out of your trading besides just heling you maximize your profits and minimize your losses. They are –

  • Risk management – To help determine the potential benefits of a protective stop, from a risk management perspective, MAE is essential. For each back tested trade by final trade profit or loss, a scatter plot of maximum drawn down (MDD). Beyond which a few trades ever end up profitable, if there is an MDD level, then it may be helpful in keeping a protective stop.

  • Optimal stop loss placement – You need to know the Maximum Adverse Excursion (MAE) for each winning trade, or how far the trade went against you before turning around and then eventually becoming a winning trade.

  • Position sizing – You can increase the size and position proportionally and lower you stop loss while keeping the risk as the same by leveraging your MAE knowledge.

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