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 bookÂ 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 termsÂ varies considerably from position to position. Thinking in terms of R lets me look at my trades as a collective in a comparative fashion.
ByÂ 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.