MAE

["Walter Lake" <wlake@xxxxxxxxx>]

Hi Frans

I put this on the bulletin board because of possible confusion others may
have about MAE (Maximum Adverse Excursion).

If you do a system test of 2 MA crossovers on a tradeable, you may have 120
test reports. Each test report, i.e., 5 and 20 SMA cross will produce a
system MAE, because the MA's will cross and get you out at that MAE level.

If you pick one system report and go to trades you may see 10 to 100 trades.
Each trade will have a MAE, none will exceed the system MAE.

I do not use the system MAE  to calculate "proven correct" for the
tradeable. Instead I look at the MAE for each trade of the system (i.e., 5 &
20 SMA cross). These are arranged like a distribution under a bell curve.
What you are looking for is a "fat" tail. The distribution is put into
"groups" or "bins". See Sweeney for a complete explanation.

The same thing is done with the MFE (Maximum Favourable Excursion). This is
superinposed over the MAE. You are looking for the most number of MFE in the
smallest size of MAE.

This is the basis I use for the distance part of the "proven correct"
calculation.

When I used the expression "that what goes, goes", what I meant was that
some trades have a MAE of "0". They just take off and never look back.

... Will write later.

Walter