Thinking in R: a language for risk

[Shadow Trader]

R is simply the amount risked on a trade. If a trade risks 5 pips, hitting a 10 pip target is a 2R win, and hitting the stop is a minus 1R loss.

Measuring results in R instead of pips or dollars makes trades comparable. A 3 pip stop trade and a 12 pip stop trade can sit side by side in a journal and mean the same thing. A system's performance becomes a distribution of R values, and statistics like expectancy and drawdown are easier to read.

It also helps with psychology. A losing trade is just minus 1R, a planned cost. A losing streak of five is minus 5R, which is a known quantity if risk per trade is one percent.

To start, record the intended risk for every trade at entry, then record the outcome in R at exit. After a couple of hundred trades, plot the distribution and see how many trades exceeded minus 1R because of slippage or discipline lapses. Those exceptions say a great deal.

How many trades in the journal have a loss bigger than planned?