The strategy

The strategy was a basic short-term breakout approach that consisted of buying when the EUR/USD closed above the previous week’s high and selling short when the pair closed below the previous week’s low. The strategy was always in the market.

In addition to measuring the profit or loss for each trade signal, the maximum favorable excursion (MFE) and maximum averse excursion (MAE) were calculated.

The maximum favorable excursion is the largest open profit attained during a trade and the maximum averse excursion is the largest open loss in a trade. These terms were introduced by John Sweeney and detailed in his book, Campaign Trading: Tactics and Strategies to Exploit the Markets (Wiley Finance Editions, 1996). MFE and MAE analysis is a valuable tool for understanding the typical price behavior that occurs between a trade’s entry and exit, and can lead to intelligent rules for setting better targets and stop points.

It is the running sum of profits and losses for the trading strategy. As is often the case with breakout systems, there were long periods (in this case three years) when the equity line moved sideways to down, after which some sustained price trends lead to good profits. The strategy ultimately netted 3,677 pips.

It is compares the strategy’s equity line to the EUR/USD closing price. The approach captured some of the market’s sustained trends, missed others, and was predictably chopped up during the sideways periods.