The $1,000 Question
Someone just tells you they clicked two buttons and made $1,000 on a BTC trade.
$1000. Sweet! But was it a good trade? You can't say until you know what they risked. It could look something like this:
| Risked | Result | R | Verdict | |
|---|---|---|---|---|
| Trade A | $100 | +$1,000 | +10R | God-like trading |
| Trade B | $10,000 | +$1,000 | +0.1R | You could have lost 10x what you won... |
To tell if the trade was good, you need to account for risk with my favourite number: 'R'.
R stands for risk units, and in trading terms:
So What Is R, Exactly?
Ok time to break out the math. This is TRADING#NUMBERS after all...
An example with some nice clean numbers:
| Amount risked | Profit or loss | R result |
|---|---|---|
| $100 | $200 | +2R |
| $100 | $100 | +1R |
| $100 | -$100 | -1R |
| $100 | $125 | +1.25R |
The higher the R result, then better the trade.
But, from my experience, closing a +1R trade is by no means easy. Closing a +2R trade is very hard. As for a 3R trade, I can’t remember pulling any of these off on a low time frame.
Why 1R Can Still Be Good
It seems a poor decision then to target +1R trades right?
Why risk $100 to win $100? Is that even worth it? Shouldn’t you aim for more? And why bother if it’s as hard as you say.
Well, not necessarily, but you need the right (read: a profitable) trading system. Targeting +1R can be profitable provided you win more than 50% of the time (before fees, spreads, slippage other trading costs, which are real!).
The fact is, any individual trade has an uncertain outcome. I can follow my rules, take a valid setup and still lose. Nothing is for sure. But single outcomes shouldn’t matter if my trading system works because the edge should reveal itself over enough trades i.e. your edge.
Edge 1
Edge...ok ok, it sounds like we're getting into some lame finance/crypto bro lingo with this word. But think of it as the special sauce, the secret ingredient in your grandmother's recipe, except for your trading system.
Your system has an edge if it is consistently and systematically profitable over a large number of trades after you account for risk (and fees). It needs to be repeatable, definable and supported by evidence (i.e. a journal). Sorry, a few successful hail-Mary trades don't count.
Edge 2
Ok, lets simplify.
Your system has edge if over many trades you:
A) Win more trades than you lose, and
B) Win more $ on average than you lose on average
The combination of A and B shows a system has edge and is therefore profitable (which is exactly what I want to show in The Journal).
This introduces the concept of trade expectancy, but I'll save that for another article.
The goal for R
In simple terms, R is good. I want lots of R. I want each week to be stacked with R. I don’t want negative R. I want the total R from my system to increase over time.
I stopped caring about winning or losing individual trades (ok that's a lie, I want to win them all...). I care that my system returns lots of R over time, whether it be weekly, monthly, yearly.
And this is what I’m looking to optimise with my system through TRADING#NUMBERS.
Scaling R
Once I have a sufficiently large sample and greater confidence in my results, I can choose how much money each R represents.
For now, 1R might represent $50 or $100. Eventually, if my system and execution justify it, I want +1R to be $5,000.
So, the next time you see a screenshot of someone closing a $15,000 trade, remember this article and that you can't tell if it was good without knowing the R result. Also, it was probably a demo account anyway and no one banked $15K.
Hope you enjoyed the article and know a bit more about R. Sign up below so I can build my list (which is just as important as R).
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