Level the Playing Field: Measuring Results Using R Multiples

[robertm 10]

"My stock is up 50%", "I made a 150% ROI in just 10 minutes", "I took 100 pips out of the market today", "I made $2000 yesterday, smokin' it". So what? Tell me what your Risk Multiple was and you will instantly paint me a picture of your trade result - regardless of market, instrument, time frame or margin requirements.

 

I love all things associated with risk & risk management, if you can get a handle on this area you are well on your way to at least surviving long enough to work out what trading is all about.

 

One of the most useful tools in my risk management arsenal is breaking every trade down to R multiples. So what is R?

 

R = Risk.

 

If we have $100K in our account, and we risk 1%, then we are willing to lose $1000 on our trade.

 

If we are using a 1:1 risk reward, then we are limited to making $1000 on our trade, or 1xRisk (1R).

 

If we trail our stop or use variable targets and we make $3500 on our trade, then we made 3.5R.

 

Now how we interpret ROI (Return On Investment) is somewhat personal. In my opinion if we made $1000 on our $100K capital on this trade, then we made a 1% return on our trading capital. ROI had nothing to do with how much we were risking, or the fact we were trading E-mini's with one contract and put up a $500 margin. We did not make a 200% "ROI" on our $500 margin, this had nothing at all to do with our risk, or reward, and varies from broker to broker.

 

Similarly let us look at the other all time favorite - pips. People love to be the "pipmaster", the "pipmonster" or the "pipster". Who cares. So you made 100 pips on your trade, tell me how many pips you would have lost if your trade went straight to your stop after entry. 25? 50? 150?. Let's use 150 for our example.

 

Risk, 150 pips. Using volatility position sizing we are still risking our $1000, it will tell us how many contracts we can buy on this trade (or our pip value etc). Reward, 100 pips, or $666.

 

100/150 = 0.66R for our trade, or 1:0.66 Risk:Reward. Not looking so flash now are we.

 

However, if you were risking 25 pips and pulled 100, then you have nice 4R winner, or 1:4 Risk:Reward, and are well on your way to trading profits.

 

Another favorite is the Scale Out. I've seen trade results reported as "we made 200 pips on the last trade". Actually they scaled out some at 25, some more at 50, bit more at 100, more again at 150, and then decided at 200 it was time to close the trade and crack open the champagne.

 

Providing (but unlikely) they tell us the initial entry, stop and number of contracts at each scale out point, then we can average the result and obtain a Risk multiple for their published trading results.

 

Let's assume it was 50 pip risk & following scale out (typical and common in many trading rooms, and by no means a recommendation!!!!!).

 

Risk : 50pips

Contracts : 10

25 pips : Scale 1

50 pips : Scale 5

100 pips : Scale 2

150 pips : Scale 1

200 pips : Scale 1

 

So: ((25x1)+(50x5)+(100x2)+(1 50x1)+(200x1))/10 = 82.5 pips per contract.

 

R Multiple = Win/Risk = 82.5/50 pips = 1.65R

 

A trader using the same strategy with a 25 pip stop would have achieved a 3.3R Return.

 

A trader taking the same signal, 50 pips risk, and a single profit exit at 200 pips had a nice 4R return.

 

If any of you have wondered why you could never match all those spectacular published results and "make $xUSD per pip based on our results, just enter your pip value here", as promoted by many trading signal services, then the penny is probably starting to drop right about now (aside from the fact they tend to open their rooms after blistering market runs).

 

Now R multiples alone do not tell us if a traders system is profitable or not, we also need to take probabilities into account to generate our expectancy per trade, but that's a story for another day.

 

So the next time some trading wunderkind tells you how much he made, ask him what his profit is as a multiple of Risk, although you will probably need to point them to this article before they have any idea what you are talking about..... :rofl:

[SIUYA 11]

nice little assessment robert.

Much the same as when looking at larger funds and comparing them - things like the sharp and sortino ratios (among other things) provide some insight allowing better comparisons.

[TheNegotiator 13]

Of course it's a very important thing to look at because trading is about multiple trades and not just one. So it's very important that we should be able to measure our performance and consistency of performance over time to gain a better understanding of our efficacy as a trader.

 

What rather amazes yet does not surprise me, is that people write books on these things which boil down to being risk:reward ratio and average trade return. What is even more interesting is that people need them to write books on it. I believe a good deal of trading is about diligence and common sense. Yet all too often, people who wish to be successful traders, just aren't willing to put in the leg work and face the facts that may come to light because of it. People are all too often deluded and far happier to blame someone or something else for their poor performance. Do the work, look at the facts, improve your trading.

 

Just my take on things.