MFE and MAE: Using a Trade's Best and Worst Excursions to Assess Stops and Targets

A trading record containing only wins and losses cannot tell you what to improve. A trade that fell immediately after entry and one that reached +1.8% before reversing into a stop may both be losses, but their causes differ. MFE and MAE distinguish them.

What are MFE and MAE?

MFE, Maximum Favorable Excursion, is the distance to the most favorable point reached while holding a position. MAE, Maximum Adverse Excursion, is the distance to the most unfavorable point. Both use the entry price as zero.

For a long position, the holding period's high determines MFE and its low determines MAE. For a short, the relationship reverses. Unlike a win/loss record that retains only final P&L, these two values compress the path a trade traveled into two numbers.

The guide's diagnosis is that many A-type trades call for revisiting entry conditions, while many B-type trades call for revisiting profit-taking and trailing rules while retaining entries. A trading journal that only counts wins and losses cannot make this distinction, leaving improvements to intuition.

Using MAE to assess stop distance

Most people work backward from an affordable loss amount when setting a stop. That makes sense for account management, but whether the stop sits inside the strategy's normal fluctuations is a separate question. A stop narrower than ordinary movement cuts off trades even when the direction ultimately proves right.

The guide looks to the MAE distribution of winning trades. Collecting how far eventual winners first moved against the position provides evidence for how narrow a stop might be.

In this example, a −0.6% stop sharply reduces the win rate because it interrupts trades that would have won, not because predictions deteriorate. Widening the stop to −3% prevents most of those interruptions but increases each losing trade's loss and can undermine expectancy. The MAE distribution puts numbers around the tradeoff.

The required distance grows in volatile conditions. That is why stops based on multiples of ATR are often used instead of a fixed percentage. If you need the fundamentals, start with stop-loss basics.

Using MFE to assess targets and trailing stops

MFE answers the opposite question: how far does this strategy actually move in its favor? A target beyond the MFE distribution may never be reached before a reversal. A target too close gives up movement the strategy could capture.

If 37% of losing trades once moved at least +0.8% in favor, the guide identifies profit capture as the issue. It proposes two responses: lower the target toward the MFE median to raise the hit rate, or use a trailing stop that exits automatically after a pullback from the high. The distribution's shape informs the choice. Widely dispersed MFE often favors trailing, while a concentrated distribution often favors a fixed target.

Also examine winners' MFE. If winning trades average +2.0% MFE but realize only +0.7%, the realized-to-MFE ratio is 35%. Record this capture ratio weekly to assess the effect of changes in profit-taking timing.

Diagnose causes using four categories

Cross-referencing MFE and MAE with outcomes divides trades into four types. The following framework helps prioritize improvements.

Failing to separate ③ and ④ can lead to changing the wrong component. A common mistake is repeatedly tightening entry conditions when ④ trades are accumulating, merely reducing the trade count. The smaller sample then makes judgment harder.

How to collect the data

Exchange trade history alone does not provide MFE and MAE. You need the price path between entry and exit. The process is straightforward.

① Create a trade list: Symbol, direction, entry time, entry price, exit time, and exit price. Most are available in exchange-history CSV files.

② Obtain candles for the holding period: One-minute candles are a reasonable starting point. Five-minute candles may suffice for positions held longer than several hours. For scalps lasting one or two minutes, one-minute candles obscure the path, so trade-level data is needed.

③ Extract the period's high and low: For a long, MFE = (period high ÷ entry price − 1), and MAE = (period low ÷ entry price − 1). For a short, reverse the signs and the high/low roles.

④ Use a consistent fee convention: MFE and MAE are usually measured from price before fees, while final P&L is measured after fees. Mixing the two creates confusion such as “MFE was +0.3%, so why did I lose money?” If round-trip costs are 0.1%, a trade with only 0.3% MFE has little room to capture profit.

Pitfalls: look-ahead bias and sample size

MFE and MAE are powerful but easy to misuse. Follow two principles.

Do not use them as entry conditions: MFE and MAE become final only after a trade ends. A rule such as “enter only trades that will achieve MFE above 1%” uses information unavailable at entry and creates look-ahead bias. Performance built that way cannot be reproduced live. These are retrospective analysis measures, not signals. This trap is especially common in backtesting.

Do not draw conclusions from small samples: A stop chosen from a 20-trade MAE distribution may fail in the next 20 trades. The guide calls for at least 30 trades, preferably 100 or more, covering different market states: trends, ranges, and sharp moves. A stop based only on one bullish month may fail in a ranging market.

Also examine the median and upper ranges alongside the average. MFE and MAE have heavy tails, so a handful of large values can lift the whole average. An average MFE of 1.5% might actually represent mostly 0.3% trades and a few 8% trades.

Once stop distance is set, determine quantity. Position sizing explains how to work backward from an affordable per-trade loss fraction to contract count. Stop distance and quantity must be set together: widening the stop while keeping quantity unchanged increases drawdown accordingly.

Three key points

① MFE is the most favorable excursion during a position; MAE is the most adverse. They help distinguish entry issues from exit issues that a single win/loss record hides.
② Use winners' MAE distributions to assess stops and losers' MFE distributions to assess targets and trailing. Many losing trades with large MFE point toward exit management.
③ MFE and MAE are for retrospective analysis. Using them as entry conditions creates look-ahead bias, and conclusions based on fewer than 30 trades or only one market state can reverse.

Caution

The distributions, trade counts, and capture ratios here are examples of calculation methods, not measured performance from a specific account or strategy. MFE and MAE analysis organizes historical records and does not guarantee returns. Leveraged trading can lose the entire principal. Investment decisions and their consequences are your responsibility.