How to Use R-Multiple Trading to Analyze Risk

How do professional traders analyze risk?

The simple answer: R-Multiple.

Ah, the R-Multiple - often one of the most overlooked and misunderstood trading metrics. 📊

(It doesn’t have to be that way, though.)

We did a deep dive into understanding R and R-Multiple a while back. For a full look at R-Multiple check that out.

But feel free to get started here first 🙂

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How does R-Multiple Trading work?

If that’s still confusing, here's a breakdown of how R-Multiple Trading works:

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⚪ You risked $1 on a trade and made $2 in reward.

That’s a 2R trade. ✅

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⚪ You risked $1 on a trade and expect to make $2 in reward but you lost $3 instead. Oof!

That’s a -3R trade. 🤡

⚪ You risked $1 on a trade and made $1 in reward.

That’s a 1R trade. 👍

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Get the picture? 🤓

While of course there’s MUCH more to it than that, we’ll spare you the details for now.

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The question is, how can we derive meaning from this R-Multiple number?

There’s quite a few pieces of insight that you can learn when analyzing your R-Multiple. 🤓

◼️ Stop loss discipline

◼️ Long-term profitability

◼️ Strength of strategy

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Let’s dive into an example:

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You buy 100 shares of SPY at the 400 key level. You set your stop-loss at 399. Your profit target (where you expect to exit for a gain) is 402.

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➡️ Entry: 400

❌ Stop loss: 398

🎯 Profit target: 406

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If we were to say this aloud, you’re risking 1 point ($100 in this scenario) to catch 2 points ($200 in potential profit).

$200/$100 = a 2R potential trade.

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Let’s say that price immediately moves against you.

It’s gone to 399.

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According to your plan, you should be closing the trade...😌

If you were to exit for a loss here it would be a -1R trade.

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You’d have followed your stop loss and can move on to the next trade.

But, you continue holding in hopes of a move higher. 🤞

(Where’s that clown emoji?)

You can see where this is going… 😅

Now it’s at 398.50, and 398. You exit at 398 for a larger loss than you had planned. 😒

You've risked 2 points here instead of 1. That makes for a -2R trade.

What happened? That’s a lot different than the +2R trade you had planned out!

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What can we learn from this? 🤔

Well…we can understand that any trade that goes beyond a -1R means that you didn’t follow your stop loss.

Here's a guide:

2R and above... Great! 💰

1R... In the green. 🟢

0R... You broke even. ⚪

-1R... You exited at your stop loss. ️✔️

Below -1R... You held past your stop loss. 🤡

Now we know our first mistake. 📝

🔀 Let’s change the scenario a bit and say that we decided to exit for profit at 401 instead of 402.

This means that we took a 1R trade, because we risked $1 to make $1.

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Two things:

1. Your planned R-Multiple was 2R, but your realized R-multiple was 1R. 📝

If this is consistent across most of your trades, it’s highly likely that your mistakes lie in not letting your winners run. 💸

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2. This might sound good because you made some money, but doing this consistently over time would mean that you would need to have a much higher win rate (60% and above). ✔️

See the table.

If you see that you can’t seem to get into trades that produce a 2R, it’s possible that your strategy needs to be refined. 🔨

Perhaps you need to find a strategy that works better for you to be able to catch more explosive moves. 🚀

These are just a few of the amazing things you can learn from R-Multiple in trading.

If this sounds interesting to you... check out our Definitive Guide to Understanding R and R-Multiple blog post here for an in-depth look at how to identify patterns and set targets so you can have a grip on your R-Multiple!

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