To R Or Not To R
A couple of the trading blogs I read use R to describe their profit/loss on any particular trade. R is the amount they risk on the trade. So if they are risking $5 and the profit from the trade is $5, they say their profit was +1R. Or if they profit $7.50, then their profit was +1.5R.
Similarly, if they lose $5 on that trade, their loss was -1R. Due to slippage, it is possible to lose more than -1R.
Anyway, some people don't like reading about R. It doesn't mean anything to them. R could be $5 or $50,000. Just saying "I got stopped out for -1R" is meaningless. They say.
You could also say that talking about a profit of $5 is equally meaningless. Risking $100 to win $5 is a lot different to risking $1 to win $5.
So, just R figures or just $ figures doesn't seem to say much. Perhaps both should be given.
However, let's say a really fantastic trader doesn't have any money to trade with. It happens. We have phone bills, petrol to buy, mortgages on our fabulous mansions. If he/she told you that they profited +10R on trades day in, day out, those fantastic results may be overshadowed by the fact that he/she was only risking $10 at a time.
People are very quick to scoff when it comes to trading. People are going to lose the benefits of reading whatever that trader had to say, just because (for whatever reason) he had no trading capital to begin with.
Further, even though people write blogs about their trades, they are still allowed some privacy. They shouldn't need to tell everyone how they won/lost $10,000 last month.
So you might lean towards using a standard starting figure. Let's say $100,000. All figures are then based on if that person had exactly $100,000 in their trading bank at the start of each month, or year. It provides privacy and the required information.
But does it? If you think about it, using a standard starting figure tells you nothing more than telling you about R.
So to conclude, the Rs have it. If you really want $ figures, work them out for yourself based on your own account balance.
8 Comments:
As far as I can tell there's only one person who has an issue with R multiples. I'm pretty sure that the Glenn who left the comment on Eyal's post is the same person who complained about my use of Rs instead of dollars.
Oh. Ok. Well, I hope I set him straight :-)
Thanks Mike.
Hi Micheal,
The comment in regards to your 100R post? No that was not me, I use my real name and you know my email address. I did read that comment and I guess it stuck in my mind when reading all the blogs that use R. I am not complaining about you guys posting trades using R's I am just saying what I think as a reader. I appreciate any and all sites that have the guts to post their trades in R or in $.
Glenn
I guess at the end of the day, some folks want to know whether or not someone can actually live off of their trading gains (you know, pay those phone bills, mortgages, fuel the Ferarri, etc.). In that regard, only $ will give the answer. Of course, it's all relative, so the next thing folks would want to know is "how much money are you "trading for a living" with?"
Which brings us back to taking the R values posted by the blogger, and using the size of your own trading bank to make your decision.
Let's say someone made it to +100R in exactly 12 months. If you need $40K to live with, it means you need to have risked a total of $40K for you to be able to live off the proceeds.
It doesn't necessarily mean you need a $40K trading bank, though.
It all depends on how many trades it took to reach that +100R. Let's say it took 200 trades.
So you divide $40K by 200 trades to see how much you would have risked on each trade. And you see that it was $200.
And if you were risking 2% of your trading bank on each trade, and we assume that your trading bank was not added to at any point during the year, you would see that you needed a total trading bank of $10K to complete the dream.
Is that maths right? Help me out here. That would mean you quadrupled your money in 12 months. Well, I guess not everyone is making +100R in 12 months, so it could be true.
Is it true?
Sharky:
If you need $40K to live with, it means you need to have risked a total of $40K for you to be able to live off the proceeds.
Perhaps you mean gained instead of risked. You'll need to have gained $40k, but to gain $40k from $40k the total risked isn't necessarily $40k. For instance, risking a $1000 total over some number of trades and making 40R net or risking $2000 total and making 20R net, etc.
The only case for which you'll have to have risked precisely $40k to make $40k is if your average net R per trade is 1R (i.e. you make one risk unit per risk unit). Or more specifically, your expectancy is 1.0 (e.g. W% = 50%, W$/L$ = 3.0).
For instance if a trader's expectancy is 0.18, that means that for every $1 risked the trader made $0.18 or rather 0.18R, where R is $'s risked per trade.
So to make 100R with an expectancy of 0.18, one would have to make 100R/(0.18R/trade) or about 555 trades. If you were risking 0.3% per trade, you've risked 555*0.3% = 167% of equity total over the course of making that 100R.
--
I don't think that either of the two posters were getting at this, but there is the possibility for ambiguity using 'R' in the context of equity performance over time. If the definition of R, as a percent of equity, changes over time (i.e. money management) and the analysis doesn't normalize R over the period, one could have a net positive R and still have a net loss. That would likely only occur if your money management was nearly opposite of what it should have been (i.e. increase risk unit when you're more likely to lose and decrease when you're more likely to win). Note that this would also mean that it's possible to have a negative net R but a net gain in $ with "good" money management!
In short, R seems to be typically used as a metric for measuring entry and exit performance and can be translated into equity peformance by including money management.
Hope that makes sense and thanks for sharing guys.
- MikeB
Sharky, I think you explain it well but you've left out an important key point: R is risk standardized. This way we can compare trading performance across platforms and methods. This is why R is a more meaningful metric than dollars.
Hmmmm, it was late last night when I tried to do that math... And I had been dipping into the ol' homebrew a little...
Lucky I've got smart readers who like to write comments.
Cheers guys.
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