What is R?
Or The R Multiple?
When trading you need some way to manage your risk. One of the most effective and notable strategies is the R method. When talking to new traders I like to give the example of a poker player. You start out small and overtime you end up building your bankroll/trading capital to a sizable amount. What makes the R multiple so helpful is it allows you to size your position relative to risk. This allows you to understand the risks required when trading and risk what you are comfortable with. I am shocked everyday on twitter by the amount of people unaware of these risk management concepts.
Lets say you have $25,000 in trading capital. You are still learning the emotional swings so you decide to risk 1% per trade. This is your R. For every trade you will risk 1R which is $250 per trade. Now it is only a matter of calculating position size relative to your risk.
For example, you are bearish on the Dollar Cad and you find an excellent setup. You see sell pressure start to build after two 6h candles. You determine an ideal stoploss is 20 basis points away from your entry, and just above the high of the last 6h candle. The target is 60 basis points down near the previous support.
(20*3)=60 basis points. Or (0.15%*3)=0.45%. As you can see in the example chart below. This is a 3R trade. 3x your allocated risk.
*Before the trade you need to calculate the position size necessary to let you take this trade with your risk parameters in mind. For this example with a 20 point stoploss, you would short the UsdCad with 1.229 lots. This allows you to only lose $250 if your trade setup ends up being wrong. It also allows you to win $750 when the trade setup is proven right.
The higher the risk/reward ratio you have on your trades, the fewer times you have to be right to still make money. This will allow you to master your favorite setups before adding any new ones. It also allows you to be right less and still be profitable.
A really good resource for determining position size is here over at Fxbook.
-The higher the risk/reward ratio you have on your trades, the fewer times you have to be right to still make money
If you have any questions feel free to let me know.