Maximum Favourable Excursion (MFE)

Maximum Favourable Excursion (MFE), like MAE, was popularised by John Sweeney in the 1990s as a tool for trade-exit analysis. Where MAE diagnoses stop-loss placement, MFE diagnoses take-profit and trailing-stop logic.

Formal definition: MFE for a trade = max(open_profit_during_trade), measured in pips, dollars, or R-multiples.

Diagnostic use: compute the ratio realised_profit / MFE for each trade. Across many trades, this ratio reveals how efficiently the exit logic captures available profit. - Realised/MFE near 1.0: the exit logic captures most of the available profit. Excellent. - Realised/MFE 0.5-0.8: the exit logic captures meaningful profit but leaves some on the table. Typical for trailing-stop strategies that give back a portion of unrealised gains to lock in larger overall wins. - Realised/MFE < 0.3: the exit logic is leaving substantial profit on the table. Either the take-profit is too close (premature exit) or the trailing stop is too tight (locked in early when continued moves were available).

The optimisation tension: tighter exits realise more of MFE on individual trades but exit before extended trends; looser exits give back more on individual trades but capture the rare 5R+ wins that drive trend-following profitability.

MFE distribution analysis reveals strategy character: a trend-following system shows a long-tailed positive MFE distribution (occasional MFE of 10R+, many small MFE); a mean-reversion system shows clustered MFE near 1-2R; a grid/martingale system shows clustered small MFE with the rare catastrophic large adverse — opposite tail.

Combined with MAE: each trade plotted as (MAE, MFE, Realised) on a 3D chart reveals exit-logic efficiency. Trades clustered along the MFE-Realised diagonal have well-tuned exits; trades scattered below indicate exit logic that loses to MFE.

Implementation: track each trade's highest equity point during the holding period. Most retail EAs do not output MFE natively; custom logging is required.