How MFE and MAE Improve Stop-Loss and Take-Profit
Using MFE (Maximum Favorable Excursion) and MAE (Maximum Adverse Excursion) to improve stop-loss and take-profit — the core logic is "let the data speak for your intuition." They don't give you a fixed answer like "set X pips," but help you figure out: how far this instrument normally moves in your favor after entry (MFE), and how far it normally moves against you (MAE). You place your stop‑loss outside the range of "normal adverse moves," and your take‑profit inside the distance it "normally reaches."
1. First, Understand What MFE and MAE Represent
This is fundamental — you must grasp it through your own holding experience.
MFE (Maximum Favorable Excursion) From the moment you open a position to the moment you close it, when the price is most favorable to you, the maximum floating profit your account reached. For a long trade, it's the highest price during the holding period minus your entry price.
MAE (Maximum Adverse Excursion) From the moment you open a position to the moment you close it, when the price is most unfavorable to you, the maximum floating loss your account reached. For a long trade, it's the lowest price during the holding period minus your entry price (in absolute terms).
Key understanding: MFE measures "how much you could have made," while MAE measures "how much paper loss you endured along the way." These two are completely separate from your final profit or loss.
2. Collect Your Historical Trade Data and Calculate MFE and MAE for Each Trade
If you already have a trade log, use it directly. If you're still validating a strategy, use backtest data.
How to do it: For each closed trade, record three data points:
Entry price
Highest price (for longs) or lowest price (for shorts) during the holding period — used for MFE
Lowest price (for longs) or highest price (for shorts) during the holding period — used for MAE
Calculation (long example):
MFE = highest price during holding period − entry price
MAE = lowest price during holding period − entry price (absolute value)
Completion criterion: You have MFE and MAE data for at least 20–30 trades (too small a sample makes statistics meaningless).
3. Plot Scatter Charts: "MFE vs. Final P&L" and "MAE vs. Final P&L"
This is the classic analysis method proposed by John Sweeney. Once the data is visualized, many conclusions become visible to the naked eye.
How to do it:
X‑axis = each trade's MFE (or MAE)
Y‑axis = that trade's final profit/loss (expressed as a percentage or R‑multiple)
Key observations from the chart:
Profitable trades usually have a "minimum MFE": Most winning trades reached at least some minimum floating profit during their lifetime. If a trade never even touched that minimum level, it rarely ended up profitable.
The MAE of winning trades is usually below a certain value: Good trades don't suffer enormous drawdowns. If your winning trades have very large MAEs, you are enduring too much unnecessary adverse movement — your stop‑loss is too wide.
4. Optimize Your Stop‑Loss Level Using the MAE Distribution
This step gives you a clear rule of thumb.
Scenario: your MAE median / percentile is X Calculate the MAE distribution of all your winning trades, and find the 80th or 90th percentile. This number means: "for the vast majority of winning trades, the paper loss never exceeded this level."
What to do: Set your stop‑loss beyond that percentile level. For example, if 80% of your winners had an MAE within 1.5%, place the stop outside 1.5% (say at 2%). This filters out normal noise without getting you stopped out by random fluctuations.
Common pitfall: Stop‑loss set too tight, causing many trades that would have been profitable to be stopped out within their normal MAE range. As related trade analysis tools note, the stop should sit outside the "typical adverse swing."
5. Optimize Your Take‑Profit Level Using the MFE Distribution
Many traders' take‑profit problem isn't "too low" — it's "too high to be reached."
Scenario: your MFE median is Y Examine the MFE distribution of your winning trades and find the median or the 60th percentile. This represents "the normal distance price travels in most cases."
What to do: Set your initial take‑profit inside that median value, not at an extreme "if it ever gets there" level. If the take‑profit is above the median, most trades will never reach it before pulling back.
When you're done: You should be able to state: "For this instrument, under normal market conditions, price usually moves this far" — and then place the take‑profit within that distance.
6. Evaluate: Is Your Take‑Profit Rule Too Greedy?
Look at each trade's MFE alongside its actual closing price.
If the MFE of most trades is noticeably higher than the actual closing price, you are taking profits too early and leaving money on the table. Raise your take‑profit target.
If the actual closing price of most trades is close to the MFE, your take‑profit rule is working fine.
7. Risk Reminders
MAE and MFE are historical statistics, not guarantees of future behavior. When market volatility structure changes (e.g., around major news events), past data can quickly become obsolete and must be updated dynamically.
Using this data in illiquid or event‑packed periods can produce large deviations. Consider pausing its use or widening the buffer in those times.
How to confirm you've done it correctly:
After adjusting stop‑loss and take‑profit parameters, back‑test the new settings on your last 10 actual trades. If the number of trades stopped out by MAE drops noticeably, and the number of take‑profit hits doesn't decrease, your adjustment is on the right track. If the take‑profit hit rate drops but your profit per trade rises, that's also an improvement — the key is whether the reward‑to‑risk ratio improves, not just win rate.
