What is R?
R is simply the dollar risk per trade. It’s nothing but a reward-to-risk ratio. I first heard it called “R” in Van Tharp’s book “Trade Your Way to Financial Freedom”. In another of his books, “Financial Freedom Through Electronic Day Trading”, Dr. Tharp reveals the great secret of trading:
The golden rule of trading is to keep losses at a level of 1 R as often as possible and to make profits that are high-R multiples.
You often hear (read) that traders should only look for trades with a reward/risk ratio of at least 2 or 3 to 1. Expressing your results in terms of how many times your risk allows you to easily see how well your trades measure up to such a standard. So when I look at my results in terms of multiples of R I can easily tell how good or bad the trades were. I like to think of R-Multiples as telling you the efficiency of your system.
So how do I calculate R-multiple?
Simple,
Assuming your equity is $10,000
Risk averse per trade is 2%
So Risk in dollars is $200
For every $200 i lose = -1R loss
More on 'R' multiples explained by clicking here.
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