Sunday, February 22, 2015

R Multiples

I tend to think of my trading results in multiples of R. What is "R" exactly?  R is simply my risk. By measuring my trades in multiples of R, I cut out any actual monetary results from my trading. This cuts down on the emotions that have to be dealt with.

I see many people in chatrooms and twitter posting "I made $1600 on this trade", "Bad day - lost $465", or whatever. The issue with this is that profit & loss in pure dollar value is dependent on not only the size of the account, but also on the amount of the account risked on any given trade. By thinking in multiples of R, a true result for the trade (or series of trades) can be found. Here's some examples.

Trade 1
Buy price 1.00
stop 0.95, risk 0.05
sell price 1.10
result = profit / risk = 0.10 / 0.05 = 2R

I profited  2x what I was risking.

Trade 2

Buy price 22.45
stop 22.15, risk 0.30
sell price 22.30
result  = -0.5R
I lost half the amount I was willing to lose.

If I were only to take these two trades in a day, I'd have a daily result of +1.5R. It makes no matter how much $$ is on the table for me to lose. Each trade is critiqued and reviewed on equal ground.

This is the way I think. Very rarely do I ever equate money to R. I do whatever I can to not think about the dollar value that is at risk. In thinking this way, I will never act based on how much actual money I have made or lost during a trade. Thinking this way makes it the same emotionally if you're trading a $2000 account risking $45 or a $50000 account risking $1000.