MONEY MANAGEMENT
Maximum Excursion -- With A Twist
Setting Stops And Taking Profits With Maximum Excursion
by Sergei Dobrovolsky
This simple new variation on John Sweeney's maximum excursion method
should help you determine how well your system takes profits and cuts losses.
Let your profits run, but don't get too
greedy. Cut your losses short, but give your trade some space to develop.
While discretionary traders by necessity find an intuitive balance between
these ideas (or quit trading), system developers have the luxury of being
able to backtest their strategies. This technique, a variation on John
Sweeney's maximum excursion method, will help you determine how well your
system takes profits and cuts losses.
The maximum favorable excursion (MFE) and maximum adverse excursion
(MAE) methods were developed by John Sweeney in several articles published
in Technical Analysis of STOCKS & COMMODITIES. They are based
on plotting a scatterplot diagram showing each trade's final profit or
loss versus its maximum runup (for MFE) or drawdown (for MAE). Runup and
drawdown are defined as maximum unrealized profit and loss during each
trade.
FIGURE 1: MAXIMUM FAVORABLE EXCURSION (MFE). By adjusting profit-taking cutoff levels, you can end up with a system that results in better profitability.
...Continued in the August 2002 issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the August 2002
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2002, Technical Analysis, Inc.
