Maximum Adverse Excursion (MAE)

The MAE is one of the metrics that is produced by most back testing systems. It measures the largest loss suffered by a single trade while it is open. For example, a trade may end up closing at a profit of (say) 14 points but while that trade was open, at one point, the trade was at a loss of 13 points. Assuming that no other trade was in such a losing position during the back testing then this would be the MAE.

MAE's are used for a number purposes. If a mutual fund is trading a particular strategy that they have sold to their clients then they may use this metric to demonstrate the amount of risk that the fund may be exposed to on any one trade.

It is also used for measuring the viability of a system against the resources available to a trader. For example, if a trader has a small account size then they may not be able to trade some (seemingly viable) systems because they might trigger margin calls that they could not cover.

The MAE is used by some traders to determine where to place a stop loss order for the system that they are trading.

The MAE is sometimes also called the Most Adverse Excursion. In this context Most and Maximum mean the same thing and can be used interchangeably.

See also Maximum Favorable Excursion (MFE).