Maximum Adverse Excursion in Tharps "Trade Your Way"

November 20th, 2019, 11:51 PM

Hi all,

I'm reading Tharp's "Trade your way to financial freedom" and in chapter 10 (pg 296) he covers the idea of Sweeney's Maximum Adverse Excursion (MAE). I believe I understand what MAE is, but I don't understand his examples, either the chart one, or the table one. I was hoping someone could help explain what I'm missing from Tharp's explanation.

Here's what I understand from MAE, for example:
* Say you enter a corn position short at 450.00, with a stop at 460.
* Say the contract moved to 457 then you exited for a profit at 442.
* Your MAE would be 7 cents (450-457). Your initial risk is 10 cents (450-460).
* Your MAE would be 0.7R.

From what I understand, you should never have an MAE that exceeds 1R (except in cases of slippage) and your loss cannot (ever) be larger than your MAE. In general, MAE should be between 0 and 1 R.

However, in Table 10.1 (below), Tharp has multiple examples where the loss is greater than MAE and one case where MAE is >1R. How is that possible?

November 21st, 2019, 06:12 AM

Agree with all your reasoning.
I see three losses bigger than 1R.
The second and third one of 1.18 and 1.10R have an MAE the same and could be explained by slippage.
The first loss of 2.61R I also don't understand why the MAE is only 0.33R (typo?). But the loss might be an example he has thrown in as the books are quite old and maybe it is before extended hours trading so it illustrates how the markets can move overnight and it could open the next day beyond your anticipated stop. I believe the agricultural markets especially had short trading hours and you could also get caught in limit-up or down moves that could take the market against you without being able to exit.
Just my guess though.

Maximum Adverse Excursion in Tharps "Trade Your Way"

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Maximum Adverse Excursion in Tharps "Trade Your Way"