The Maximum Favorable
by David C. Stendahl and Leo J. Zamansky
Maximum favorable excursion (MFE) is the peak profit that
a trade earns before the trade is closed out. Reviewing the
performance of a trading system allows us to measure the
tendency of the MFE of the trades. This article explains how
to use the information to enhance profitability.
Maximum favorable excursion
(MFE), a concept originally created
by John Sweeney to mea-sure
the distinctive characteristics
of profitable trades, can be
used as part of an analytical
process to enable traders to distinguish
between average trades
and those that offer substantially
greater profit potential.
Using MFE analysis, traders can classify above-average performance
during a trade and thereby recognize opportunities
to enhance profitability with the MFE risk management
Following the strategy, traders can increase profit potential
relative to risk by adding to positions based on the trading characteristics of a system. This strategy can be used with all
systems, whether they are mechanized, discretionary, long,
short, intraday, or end of day. The returns of the system must,
however, exhibit certain characteristics to take advantage of
this risk management strategy.
Since every trading methodology is different, it will take a
thorough performance evaluation to determine if the MFE
strategy is suitable for the system.