Do you know your trading R? Do you even know what R is?
In trading parlance, R is the amount of risk you are taking on a trade. So for example, if you are risking 5 points on a given trade, then your R for that trade is 5 points. You can measure R in whatever terms makes sense to you – points, dollars, etc. – so long as you make sure you do so on a consistent basis.
When you ave determined your R for a trade you can then measure your performance on that trade in terms of R. If your risk was 5 points and you made 10 points on the trade, that would be a +2R. If you lost 2 points, it would be a -0.4R.
Van Tharp can probably be given considerable credit for popularizing the use of R as he discussed extensively in his book Trade Your Way to Financial Freedom. It’s a book I definitely recommend reading. Tharp does a really good job of helping you quantify your trading.
The advantage to using R in assesing your trading performance is that it allows you to normalize your trades if you don’t take exactly the same risk each time you put on a trade. I certainly know that what I risk in point terms varies considerably from position to position. Thinking in terms of R lets me look at my trades as a collective in a comparative fashion.
By pulling together Rs of all my trades I can see what my average performance is on my trades in a unified expression. That is something quite useful for comparing trading systems and for talking with other traders about their performance, since talking in points or pips tends to be meaningless.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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