Maximum Adverse Excursion (MAE)
Maximum adverse excursion is the largest unrealized loss a trade experiences before it is closed. It measures how far a position moved against the trader while the trade was open.
Why it matters
MAE helps evaluate stop placement and position sizing. By studying MAE across many trades, traders can see how much heat a strategy typically takes before becoming profitable or failing.
Example
A long trade is opened at 100. The price dips to 96 before rising to the exit at 110. The MAE is 4 points, or 4 percent.
Practical use
- Compare MAE to stop distances to reduce premature exits.
- Identify trades that violate typical MAE for the strategy.
- Improve risk limits by aligning with observed drawdowns.
Cautions
MAE is historical and does not guarantee future behavior. It should be combined with market context and volatility measures.
Practical checklist
- Define the time horizon for Maximum Adverse Excursion (MAE) and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Maximum Adverse Excursion (MAE) as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Maximum Adverse Excursion (MAE), confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.
Risk management notes
Risk control is essential when applying Maximum Adverse Excursion (MAE). Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.
Variations and related terms
Many traders use Maximum Adverse Excursion (MAE) alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.
Practical checklist
- Define the time horizon for Maximum Adverse Excursion (MAE) and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Maximum Adverse Excursion (MAE) as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Maximum Adverse Excursion (MAE), confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.
Risk management notes
Risk control is essential when applying Maximum Adverse Excursion (MAE). Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.
Variations and related terms
Many traders use Maximum Adverse Excursion (MAE) alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.
Practical checklist
- Define the time horizon for Maximum Adverse Excursion (MAE) and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Maximum Adverse Excursion (MAE) as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Maximum Adverse Excursion (MAE), confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.