Notices

Maximum adverse excursion

From Traderpedia

The MAE is a statistic provided as a result of backtesting a mechanical trading system.

[edit] What is it?

It represents the largest loss suffered by a single trade while it is open. For example, a trade may close with a loss of -2, but while it was open if it was at one point down a maximum -5, then that would be the MAE, provided of course no other trade in the backest exceeded this loss.

[edit] Why it is useful?

Although a system may seem viable on the surface, a particularly large MAE might reveal that actually it would not work in practice because the MAE would be too large for the proposed account size, perhaps eliciting a margin call that would render the backtest results inaccurate and misleading.

The MAE is also useful in setting stop losses. If a trader knows the MAE for most of their winning trades, then they can use that knowledge to arrive at a system with a favourable risk:reward ratio. For example, if a trader finds that most of their winning trades do not go against them by more than 30 points, they can then use that knowledge to cut their losses when they are more than 30 points.