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

  #1 (permalink)
Fortitudo et Honor
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Maximum Favorable Excursion (MFE) % and optimization strategies

http://www.signalfinancialgroup.com/Publications/maximum.pdf

We've had some pretty in depth and interesting discussions here on futures.io (formerly BMT). Not sure if everyone (or anyone has seen the attached above).

Interestingly, I'm discovering that IF you have a positive expectation (via a profitable trading strategy over an observed time period)...

The "best" strategy to optimize profits, is to calculate the maximum drawdown, trade the largest positionsize you can trade carrying drawdown reserve.....until you double your money.

Once you double (or some cushion) your equity, then trading the maximum positionsize possible will yield the highest profits. The drawdowns will be larger and the run ups will be larger, so overall, it simply amplifies the winning and losing streaks.

The most conservative (and generally accepted) method is to carry a reserve for every share/contract traded. This in theory, ensures that once you increase your positionsize, you never have to reduce it, as you're carrying enough reserve to weather the drawdowns.

I find the MFE strategy as a nice in between, which allows you to optimize/maximize the "bang/buck" or additional profits with either marginal increases in risk or in some cases, decreases in risk.

If you can identify "profit resistance" (the name makes me cringe, i don't think there's any physical resistance to your trades) that mark where a significant number of trades end up profitable....then it makes sense to "lean into" those trades more to take advantage.

Thoughts?

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #2 (permalink)
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  #3 (permalink)
Trading Apprentice
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Love you position sizing approach RM99


I have an idea, that may just be a standing wave in an empty scull, but you've obviously given this stuff a lot of thought,and may be able to run with it, or put it out of it's misery.
If periods of draw down are just the result of a higher ratio of consecutive losers/winners, than a previous period where you had a capital run up, might there be a way to position size based a moving average of the ratio, and if so,do you think it would be worthwhile to pursue?
blammo


"To the engineer, both pessimists and optimists use glasses that are too big"!

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  #4 (permalink)
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Was this his dissertation to get his PHD?

This is great in theory and I think the basic concept like you mentioned makes a lot of sense, but having done mechanical systems with changing dynamics within the marketplace and then reevaluating this, boy does that make things complex on another level if done the way I interpreted this document.

But the concept of waiting to double your contracts after you have doubled your account makes perfect sense. I have never been that patient and if I had a few good days, kabooom, get those contracts up! haha...

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  #5 (permalink)
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grandiose
 
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Hi!

Interesting, I have also given some thought to this important topic and my reasoning is as follows.

Mathematically Kelly is the most optimal position size to maximize equity curve.
But, naturally no-one in reality will want to stomach the DD's resulting from Kelly sizing.

But since Kelly is mathematically the most optimal size you build on that and take into account the maximum DD's and trade the fraction of Kelly you can stomach considering the max DD's.

This way you gradually increase size and also importantly avoid doubling it at certain points in time, which make you vulnerable to wipe out the whole previous period's profit if you hit the DD right after doubling. Which, taking the markets into account will happen


Just my 2 cents.

-N

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  #6 (permalink)
Market Wizard
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Looks like the URL changed to http://signaltradinggroup.com/wp-content/DCSArticles/maximum.pdf

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Market Wizard
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As an afterthought, I understand that MFE is calculated for the duration of the trade. But wouldn't it be better to calculate a MFE for how long the price has gone your way, irrespective as to whether you are still in the trade or not?

Or perhaps use a different calculation, one for in-trade and one overall??

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Market Wizard
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As an afterthought, I understand that MFE is calculated for the duration of the trade. But wouldn't it be better to calculate a MFE for how long the price has gone your way, irrespective as to whether you are still in the trade or not?

Or perhaps use a different calculation, one for in-trade and one overall??

Bumping, to see if anyone's got any views on this.

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  #9 (permalink)
Market Wizard
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  #10 (permalink)
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xplorer View Post
As an afterthought, I understand that MFE is calculated for the duration of the trade. But wouldn't it be better to calculate a MFE for how long the price has gone your way, irrespective as to whether you are still in the trade or not?

Or perhaps use a different calculation, one for in-trade and one overall??

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

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