An Adverse Excursion is the amount that a trade goes in the wrong direction after entry and before exit.   The Maximum Adverse Excursion (MAE) is the worst over the life of the trade.

For example, say a stock is bought at $30, then drops to $28 before rising to $38 then settling back to an exit at $35.   The drop to $28 is the adverse excursion.    The Maximum Adverse Excursion (MAE) is then $2.

For more information see Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management by John Sweeney.

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Tags: exit, productivity, trading

Avg Hold is also known as the average holding time.  

The holding time is the length of time that the trade is open.   The average is taken across all the trades which resulted from backtesting a particular strategy.

The average holding time is measured on the same scale as the chart time scale.    Since I am backtesting on daily charts, the avg hold is measured in days.

Extra Insight:

When backtesting a strategy, its useful to know the average holding time of all the trades made by that strategy.   This gives an idea of how long the funds are needed - on average — for each trade.   It also gives some insight into the type of trader that might like the strategy.

All else being equal, the trading strategy with the smallest average hold time is best.   Not all things are equal in practice though.   People may seek out longer or shorter hold times based on their temperment, tax situation, global market views, margin, and a host of other factors.   The average hold time gives insight into which strategies will fit these other requirements.  I also use it to classify different strategies and compare those with similar hold times.

Last updated 11/11/08.

Tags: avg hold, backtesting, productivity

Productivity refers to how hard your money works under a particular trading strategy.   Both the number of trades and the average hold time impact how efficiently a strategy manages funds.

Extra Insight: 

The number of trades reflects the opportunity to trade.   In general, a higher number is better for a profitable strategy because it means more opportunity to make money.   However, if a strategy is not profitable or breaks even, more trades just means more commissions paid to the broker and more of the trader’s time consumed.  (Even with completely automated trading, a trader still has to deal with record-keeping and other administrative tasks that grow with the number of trades.)

Backtesting short-term strategies over any significant time period generates many more trades than the average trader can afford.    Realistically, traders need to choose which signals to take.   Eventually, I’d like to make the selection criteria part of the backtest so that it can be measured and compared as well.    Right now, my backtesting engine, TradeStation, only tests one stock at a time and cannot simulate a whole portfolio.

All else being equal, the trading strategy with the smallest average hold time is best.   Not all things are equal in practice though.   People may seek out longer or shorter hold times based on their temperment, tax situation, global market views, margin, and a host of other factors.   The average hold time gives insight into which strategies will fit these other requirements.  I also use it to classify different strategies and compare those with similar hold times.

Updated 11/12/08.

Tags: backtesting, hold time, number of trades, productivity, strategy, TradeStation, trading