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Maximum Favorable Excursion (MFE) % and optimization strategies
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Maximum Favorable Excursion (MFE) % and optimization strategies

  #11 (permalink)
Market Wizard
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rleplae View Post
MFE aims at capturing the max that you could have got
high MFE with low result, means you let the profits run away

low MFE with high MAE, means the trade runs very quickly against
you and that there was never a lot of profit potential

Thank you rleplae, my question still stands, I will rephrase it:

is it better, worse or indifferent to capture MFE from your point of entry irrespective as to whether you're still in the trade?

Example (I will use arbitrary numbers with no market reference in particular).

Trade entry: 4 Trade exit: 16 In-trade MAE: 4 (or -4 but you get my drift) In-trade MFE: 20

So, by looking at my MFE while in the trade, it looks like it wasn't so bad after all.



But if I keep looking at the price even after I've exited my trade I could then see that price reached higher highs as follows

Out-of-trade MAE: 4 MFE: 54

Which tells me I should have not exited the trade!

Does that make sense?

Do you or does anybody record two separate MFE/MAE pairs for in-trades/out-of-trades? Would it not be beneficial to do so?

Thanks

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  #12 (permalink)
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xplorer View Post
Thank you rleplae, my question still stands, I will rephrase it:

is it better, worse or indifferent to capture MFE from your point of entry irrespective as to whether you're still in the trade?

Example (I will use arbitrary numbers with no market reference in particular).

Trade entry: 4 Trade exit: 16 In-trade MAE: 4 (or -4 but you get my drift) In-trade MFE: 20

So, by looking at my MFE while in the trade, it looks like it wasn't so bad after all.



But if I keep looking at the price even after I've exited my trade I could then see that price reached higher highs as follows

Out-of-trade MAE: 4 MFE: 54

Which tells me I should have not exited the trade!

Does that make sense?

Do you or does anybody record two separate MFE/MAE pairs for in-trades/out-of-trades? Would it not be beneficial to do so?

Thanks

Can be a valid metric, but most likely not to be called MFE/MAE, as it confuses what it is
I don't think i came across a name for what you are measuring

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  #13 (permalink)
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rleplae View Post
Can be a valid metric, but most likely not to be called MFE/MAE, as it confuses what it is
I don't think i came across a name for what you are measuring

Ok thank you. I'm wondering whether it'd be easier to use only one pair. At the moment personally I look at the pair for the whole day duration, i.e. irrespective as to whether I was still in the trade or not.

Kinda gives me an idea as to whether I exited way too soon or I was okay-ish.

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  #14 (permalink)
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xplorer View Post
Ok thank you. I'm wondering whether it'd be easier to use only one pair. At the moment personally I look at the pair for the whole day duration, i.e. irrespective as to whether I was still in the trade or not.

Kinda gives me an idea as to whether I exited way too soon or I was okay-ish.

you made a profit and that is good

in order to answer the question if you exit to soon or not
you need to calculate your average MFE/MAE for a series of trades
(you could do the same for your the out of trade)

if it is systematic, you can try to improve
but it is also perfectly acceptable to be good with 16 ticks on average
and miss a running, but being consistently profitable
and not screw your profitability by trying to chase a winner and loose it out on 10 other trades..

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  #15 (permalink)
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rleplae View Post
you made a profit and that is good

in order to answer the question if you exit to soon or not
you need to calculate your average MFE/MAE for a series of trades
(you could do the same for your the out of trade)

if it is systematic, you can try to improve
but it is also perfectly acceptable to be good with 16 ticks on average
and miss a running, but being consistently profitable
and not screw your profitability by trying to chase a winner and loose it out on 10 other trades..

Agreed, thanks rleplae.

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  #16 (permalink)
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xplorer View Post
...

But if I keep looking at the price even after I've exited my trade I could then see that price reached higher highs as follows

Out-of-trade MAE: 4 MFE: 54

Which tells me I should have not exited the trade!

Does that make sense?

Do you or does anybody record two separate MFE/MAE pairs for in-trades/out-of-trades? Would it not be beneficial to do so?

Thanks

As @rleplae mentioned MAE and MFE are based on entries AND exits by definition.

The insight from "out-of trade MFE" is pretty trivial: Everybody who cancels a position before a trend ends - how small it may ever be -
falls short of this number. The shorter your time frame, the worse your results will be vs the theoretical number since instead of buying
e.g. in 2009 and holding it up to last year's top, you wasted theoretical "out-of trade MFE" profit by unnecessary entries and exits.
(Same is not true for the "real" MFE since it also accounts for the profit that lies in the directional changes. And that is exactly why
also the exits are needed.)

But your basic question is valid: How much of the potential do you exploit with your trades?

That's why some traders grade their trades vs e.g. ADR or ATR. Another measure would be the expected range of
a session (ON/RTH).

Example for an intraday trader:
Daily ETH ATR14 of the ES is about 45p at the moment.

Making 70% or better of the intraday range, i.e. a sum of 31.5p+ for that day's trades, would be an A;
60-70% would be a B, 50-60% a C, everything below 50% a D. The thresholds may vary, but you get the point.

The grades make a good yardstick if one's trading maxes out a day's potential or if the trader
is just (more or less cluelessly) collecting peanuts in front of a juggernaut.

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  #17 (permalink)
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xplorer View Post
Do you or does anybody record two separate MFE/MAE pairs for in-trades/out-of-trades? Would it not be beneficial to do so?

Thanks

I do this for every trade taken and record it in a spreadsheet. I call it Total Reasonable Movement (TRM) from entry and will track price for as long as it does not hit my initial stop area or has a retracement that I deem too large to reasonably hold through (thus the "Reasonable" of the TRM). It is an objective way of gauging the effectiveness of a method irrespective of how the trades were managed. The theory being that if I start to see that my method produces good results I will have more confidence to both enter and manage trades properly. Conversely it helps keep me from deluding myself into thinking my method is good (often based on the last runner I missed out on) if it really isn't.

Over a series of trades I will look at how often price reaches 1R, 2R, 3R etc. If price is getting to 1R 60% or less of the time, I know my method needs work. It is also interesting to see how often price gets to 2R and beyond. For all those folks who think they can make up all their losses with some big runners this may be an eye opener. At least it was for me. I found that I was very often on the wrong side of the market, and even though price may have gotten to 1R there were too few big runners to statistically make up for the losses.

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  #18 (permalink)
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Thanks choke35 - perhaps I should have clarified, my question applied to intraday trading.


choke35 View Post
As @rleplae mentioned MAE and MFE are based on entries AND exits by definition.

The insight from "out-of trade MFE" is pretty trivial: Everybody who cancels a position before a trend ends - how small it may ever be -
falls short of this number. The shorter your time frame, the worse your results will be vs the theoretical number since instead of buying
e.g. in 2009 and holding it up to last year's top, you wasted theoretical "out-of trade MFE" profit by unnecessary entries and exits.

Well, let's consider the following two scenarios.

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In Scenario A above one sells at the top and buys at the bottom in one single trade.

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In Scenario B above one sells each time there's a swing high and buys each time there's a swing low.

One could argue that Scenario B is more profitable. Not commenting on the actual feasibiity of the feat, just contemplating the theoretical gains. Clearly the above could apply to any timeframe.


choke35 View Post
But your basic question is valid: How much of the potential do you exploit with your trades?

That's why some traders grade their trades vs e.g. ADR or ATR. Another measure would be the expected range of
a session (ON/RTH).

I am partially familiar with Average True Range, although I haven't yet worked out the calculation and how it relates to the volatility I see. I'm not at all familiar with ADR.


choke35 View Post
Example for an intraday trader:
Daily ETH ATR14 of the ES is about 45p at the moment.

Making 70% or better of the intraday range, i.e. a sum of 31.5p+ for that day's trades, would be an A;
60-70% would be a B, 50-60% a C, everything below 50% a D. The thresholds may vary, but you get the point.

The grades make a good yardstick if one's trading maxes out a day's potential or if the trader
is just (more or less cluelessly) collecting peanuts in front of a juggernaut.

Thanks - that's a good benchmark to use as comparison

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  #19 (permalink)
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Tap In View Post
I do this for every trade taken and record it in a spreadsheet. I call it Total Reasonable Movement (TRM) from entry and will track price for as long as it does not hit my initial stop area or has a retracement that I deem too large to reasonably hold through (thus the "Reasonable" of the TRM). It is an objective way of gauging the effectiveness of a method irrespective of how the trades were managed. The theory being that if I start to see that my method produces good results I will have more confidence to both enter and manage trades properly. Conversely it helps keep me from deluding myself into thinking my method is good (often based on the last runner I missed out on) if it really isn't.

Over a series of trades I will look at how often price reaches 1R, 2R, 3R etc. If price is getting to 1R 60% or less of the time, I know my method needs work. It is also interesting to see how often price gets to 2R and beyond. For all those folks who think they can make up all their losses with some big runners this may be an eye opener. At least it was for me. I found that I was very often on the wrong side of the market, and even though price may have gotten to 1R there were too few big runners to statistically make up for the losses.

Thank you Tap In. Perhaps I use different terminology, but what do you mean by 1R, 2R.. etc? R for 'reward'? Are you talking about targets?

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  #20 (permalink)
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xplorer View Post
Thanks choke35 - perhaps I should have clarified, my question applied to intraday trading.



Well, let's consider the following two scenarios.


In Scenario A above one sells at the top and buys at the bottom in one single trade.

In Scenario B above one sells each time there's a swing high and buys each time there's a swing low.

One could argue that Scenario B is more profitable. Not commenting on the actual feasibiity of the feat, just contemplating the theoretical gains. Clearly the above could apply to any timeframe.

True. That's why I use the (net) result of my daily trades for grading. This also averages out - to some extent -
the number of trades which largely depends on your intraday time frame / trading style. (A friend of mine has a
more extreme method: He uses PAT on volume bars and (automatically) tracks his yield for every swing where
he has an open position ... which comes close to your chart B.)


xplorer View Post
I am partially familiar with Average True Range, although I haven't yet worked out the calculation and how it relates to the volatility I see. I'm not at all familiar with ADR.

The Average Daily Range (ADR) simply averages the range of x periods irrespective of gaps. ATR also includes the
gaps in the average.

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