How far did it go your way?Set targets where the market really goes.
Your take profit tells you where you got out. MFE tells you how far the trade actually went in your favour, and across many trades it shows whether your targets are too close or too far.
How far the trade really went
Your take profit and your gain show where you got out. The next 2 columns record what happened in between: how far the trade went for you, and how far against you. The first is MFE, the maximum favourable excursion: the furthest a trade moved in your favour before you closed it. Say you buy EUR/USD at 1.1000 and at its best it reaches 1.1050: your MFE is 50 pips.
MFE shows how much profit was there to take if you had exited at the best moment. Nobody does that every time, and nobody has to. The point is to see how much of the move your exits actually capture.
Measure it against your risk
There is also MFE in percent, measured against what you risked. Say you risked 1%, and at its peak the trade could have made 3%. Your MFE is 3%, 3 times your risk, a 3:1 ratio. Close at the very top, and you would have made 3 for every 1 you risked.
Now compare that with what you actually took. If the trade reached 4:1 but you closed at 2:1, there was room to hold for more. If most of your trades reach well beyond the ratio you close at, your exits leave a lot on the table.
Keep tracking after you are out
MFE doesn’t stop when you close the trade. Say you close at your target with 2%, but price keeps going your way, and you could have exited at 3%. Update your MFE to 3%: that is 1% you left on the table. If it keeps happening, your targets are too close.
It works the other way too. Say the trade reached 2.5% in your favour, then turned around and stopped you out at breakeven, with no profit and no loss. That tells you your targets might be too far away, and you could lock in profits earlier.
Change your targets on the pattern, never on a single trade. Track how far your trades really run, and set your targets where the market actually goes.
Keeping the MFE column
Write down the best price the trade reached and its MFE in pips and in percent.
Check whether price kept going after your exit, and update the MFE if it did.
Mistakes to avoid
- Measuring MFE only until you close. The move after your exit is what tells you whether your targets sit too close.
- Moving every target further out after a single big runner. Wait for the pattern across many trades.
In short
- MFE is the furthest a trade moved in your favour before you closed it: buy EUR/USD at 1.1000, see it peak at 1.1050, and your MFE is 50 pips.
- In percent, measure it against your risk: 1% at risk and a peak worth 3% is a 3:1 ratio, and a trade that reached 4:1 but closed at 2:1 had room for more.
- Keep tracking after you close: trades that keep running past your exit mean your targets are too close, and big MFEs that end at breakeven mean you could lock in profits earlier.
Questions
Should I aim to close at the MFE?
Nobody closes at the exact top every time. MFE shows how much of the move your exits capture on average, so you can set targets closer to where the market actually goes.
Why log MFE in percent as well as in pips?
Pips tell you how far price moved. The percentage, measured against your risk, tells you what that move was worth: a 3% MFE on 1% risk is a 3:1 trade.
Key terms
- MFE (maximum favourable excursion)
- How far a trade moved in your favour before it closed. It shows how much profit was available.
- Pip
- The smallest standard price step in a currency pair. For most pairs it is the fourth decimal (0.0001), for yen pairs the second (0.01).
- Risk to reward
- How much you can win compared with how much you risk. At 1:2 you aim to make 2 for every 1 you risk.
- Breakeven
- The point where a trade neither wins nor loses. Moving the stop to breakeven means the trade can no longer lose money.
- Take-profit
- An order that closes your trade at a set price to lock in the gain.