Trading Psy Ops – Knowing the MAE
MAE stands for Maximum Adverse Excursion. Not my invention, this is something I took from Tom’s concept of trading and this is something similar to Stop Loss. But there is little more to it and that is the reason I have added the same on my trading journal. Let us have a closer look.
This is more applicable for folks who wants to play all sorts of shot (Backhand, Forehand, Ace Service etc.) on trading and ‘own’ multiple trading systems to leverage most of the market movements.
1. Suppose you have 3 trading systems (A, B and C) and as per your analysis you see that likely-hood of getting an entry trigger is more from system B based on current situation
2. You entered the position on trigger (assume Long) and kept your stop loss based on the failure point – FP (most difficult part, as sometime it is really deep or may be it is too close to entry raising doubt of its survival to minor spikes)
3. Price swings across your entry – profit zone /losing zone and finally proves that your system was right and it meets the target and you book profit or trail SL
The MAE is the count of the pips the market went in maximum against to your entry point before making the directional movement to profit-zone.
I hope till this point we are clear.
Tom actually derives most of his trading ideas from an exceptional amount of data crunching based on the real-trades from his journals and also from some back test. He uses MAE to find the pattern where the possibility of getting FP (failure point) of the trade is further optimized.
Let’s take an example:
• Suppose I am trading reversals based on my hourly BB-CCI system
• I entered long when price either moving upwards from BB Low or BB Mid and CCI does a Zero-Line-Rejection or crosses the 34 EMA overlay from below
• I entered my SL based on traditional concept at the bottom of last rejection wick (or something like that based on situation) – say this is about 40 pips from entry (consider this as a positional trade)
Now the funny part
• Price goes against me by 12 pips (so my SL survived) and then continued upward journey and I booked profit at some 95 pips with more than 2R and out
Or
• Price goes against me, system failed me, SL hit costing me 40 pips
To exploit MAE – I have to either back-test (if it is a new system, and check manually the successful trade only) or look at my journal (if it is an old system, I have quite a decent amount of past trading record on this system)
--> to find out,
what was highest MAE among all the successful trades. Say we found this to be 20 pips.
This essentially means – for this particular setup, for all the trades till date, if the price had gone against me by
more than 20 pips from entry it turns into a losing trade- so 20 pips is my 'MAE' for that setup.
So on a live trade if it is breaching the MAE, the chances of faiure is increased proportionally and it is better to get out.
So in a way it helps in optimizing your SL setup in big way, improving R/R. You really need not to wait for a mechanical Exit signal or SL Hit. Your MAE becomes your stop-loss. This is applicable to all sort of trades including Positional, Intraday, Swing Hourly, Scalping (Tom actually uses this for his scalping, but I found this to be valid for all types of trades I take).
One important note, the
reliability of MAE for a setup is based on the volume of the successful trades you analysed. Just deriving a MAE going 10-12 trades will not be fare.
Please note MAE will be different for different trade setups, so there is no point keeping a fixed SL each time.
As of now, I have added an extra column on my trade-jounral and noting down MAE of all my trades. I am too lazy to backtest and go by each of the trades. May be I will do logging for whole of this year and let you know if this really works. But knowing this guy (TD), I know he does not $hit around with bluffs, so I am taking this seriously.
Hope this helps.
