R-multiple: the unit that tells a good trade from a big one

A trader makes $300 on Monday and $40 on Tuesday, and files Monday as the better trade.

Monday risked $300 to make $300. Tuesday risked $20 to make $40. Measured against what each one put at stake, Tuesday paid twice as much. The dollars said the opposite, because dollars measure size, and the size was never the same.

That is the whole case for R.

What R is

R is the amount you stand to lose if your stop is hit, fixed at the moment you enter. It is one unit, and every trade gets its own.

A trade’s R-multiple is its result divided by R. A trade stopped out cleanly is -1R. A winner that made twice what you risked is +2R. A trade that closed at its entry is 0R.

Working out R is the arithmetic you already do when you size. For shares, it is the number of shares times the gap between entry and stop. For forex, lots times the stop distance in pips times the value of a pip. For futures, contracts times the stop distance in points times the value of a point. The answer is money at risk, and you divide the trade’s profit or loss by it.

The same trader at two account sizes

Take ten trades, written in R: +2.5, -1, -1, +0.8, -1, +3.1, -1.2, -1, +1.0, +2.2. Five winners totalling +9.6R, five losers totalling -5.2R, and a net of +4.4R.

Now give that trader two accounts. On the first, 1R is $25. On the second, 1R is $500. The first log ends at $110 and the second at $2,200. In dollars they look like two different traders. In R they are the same ten trades, with the same lesson in them.

That is why R is the unit that survives a bigger account, a prop account, or a comparison between this month and the months when you traded smaller. Dollars change every time size changes. R does not.

The loss that was not -1R

Not every loser is -1R. A stop that slipped, or a stop that was moved away from the entry, gives -1.2R, or -3R. In the ten trades above the seventh is -1.2R, and it is the most useful line in the log, because it is the one that left the plan.

A log that records every loser as -1 erases exactly those trades. If your sheet never shows a loser worse than -1.0 on live fills, it is rounding for you. “I moved my stop” is a sentence with a number underneath it is the longer version of that argument.

What R does not tell you

R gives you the size of each outcome. It does not tell you the strategy works. Ten trades in R make a tidy table and prove very little, because the average of ten trades is a wide guess, which how many trades before your numbers mean anything works through.

R is also only as good as the stop behind it. A stop placed at random makes R random. And R is fixed at entry: moving a stop to breakeven does not change it, and a trade that then closes at its entry is 0R, not a free trade. The risk was real until the stop moved.

Where R meets your drawdown floor

Once your trades are in R, a limit becomes a count of R. If you risk 1 percent of the account per trade and your daily loss limit is 4 percent, the day ends after four full losses. If a trailing floor sits 6 percent below your balance, you have six stops of room, and every stop that slips to -1.2R uses up more of it.

The R you size by and the floor you are sized against are two different numbers. The ratio between them, how many full stops fit before the account ends, is worth writing down before the next trade.

The one column to add tonight

Beside your last twenty trades add two columns: R at entry, in your account currency, and the result in R, which is the result divided by R. Work R from the stop you set at entry, never from the one you finished with. If you cannot reconstruct the original stop for a trade, write “unknown” and leave the guess out.

Then answer one line: what is my average winner in R, and my average loser? If you cannot say, that is the first finding.