System Design  |  MAR 1999

The Maximum Favorable Excursion Strategy by D. Stendahl and L. Zamansky

The Maximum Favorable Excursion Strategy 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 strategy. 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.

by D. Stendahl and L. Zamansky