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Maximum Favorable Excursion (MFE)

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Definition of 'Maximum Favorable Excursion (MFE)'

The MFE is a metric that is often produced when running back testing of a trading strategy. The MFE measures the most (maximum) profit that could have been extracted from a given trade.

If, for example, a trading strategy stated that the trade should be closed out at 5 points profit. If the market continued in the trade's direction for a further 13 points then the MFE would be 18 points in total. This is the measure of the maximum number of points that could have been made if you had closed the trade at the "end of the move" or the most profitable point.

This figure will usually be shown alongside the profit figure when a trading strategy's results are tabulated.

This figure is frequently used to calculate the optimum point at which to take profits. If, for example, the minimum MFE for your trading strategy was 8 points and your strategy had previously been taking 5 points of profit then moving the profit target to 8 would yield an extra 3 points per profitable trade. Optimization can also take place by counting the collections of MFE's and calculating which ones (the lower valued ones) can be sacrificed for higher profit trades but few profitable trades.

See also Maximum Adverse Excursion (MAE).

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