Definition of Adverse Excursion

An Adverse Excursion refers to a trade going in a direction opposite to the one desired by the trader, after she/he has executed it. For example, a drop after buying, or a rise after shorting a stock would be an adverse excursion, specified by the amount of movement in the price.

The Maximum Adverse Excursion (MAE) is the biggest such movement over the life of the exchange.

Points to remember

• The Maximum Adverse Excursion is utilized by traders to figure out where to put in a stop loss request for the framework that they are exchanging.
• Adverse Excursion as a term is mostly known to be used in the derivatives market.
• The only thing that can prevent the adverse excursion from getting too big as a proportion of the original investment is a strict stop-loss strategy.

Example
A stock that is purchased at Rs. 500 may drop to Rs. 400, before going back to Rs. 600, then stabilising at Rs. 550. The drop to Rs. 400 is the adverse excursion, with the Maximum Adverse Excursion being Rs. 100 (i.e. 500-400).