What R means, and why you should stop counting in currency

Kroner mix two different questions

Most people who start trading measure themselves in currency. That is understandable, because currency is what lands in the account. The problem is that a currency amount mixes two completely different questions: how good the trade was, and how large it was.

A profit of 800 says nothing until you know how much you had at risk to get it. If you had 200 at risk, you did something right. If you had 4,000 at risk, you took a large chance for a thin payday. Two trades with an identical currency result can easily be the best and the worst trade of your month.

R removes that confusion. R is the amount you had decided in advance to lose if the analysis was wrong. Everything else is measured against that number.

The definition

R is the distance from entry to stop loss, multiplied by position size. It is currency, but it is the currency you accepted losing before you pressed the button.

The result of the trade is result divided by R. Hit the stop, and it was minus 1R. If the profit was twice the risk, it was plus 2R. If you got out early with a small loss, it might have been minus 0.4R. The unit is the same whether you traded bitcoin on a five-minute chart or a stock you held for three weeks.

Work it out once, and it sticks

Say you have 50,000 in the account and have decided to risk a maximum of 1 percent per trade. That is 500. You find a setup with entry at 100 and stop at 96. The distance is 4 per unit. 500 divided by 4 gives 125 units.

Now everything is locked. The position is 125 units, R is 500, and a hit on the stop costs you exactly 1 percent of the account. If you put the target at 112, the distance is 12 per unit, so 1,500, so 3R planned.

Notice the order. Stop comes first, position size follows from it. The most common beginner mistake is the opposite: you decide to buy 10,000 worth, and then look for a place the stop can sit without hurting too much. Then the wallet is steering the analysis, not the chart.

Leverage does not change R

Many people think leverage itself increases risk. Leverage changes how much capital is tied up and how close the liquidation price sits. Currency risk is still set by the distance to the stop and by position size. If you have 500 between entry and stop, you lose 500 whether you used 2x or 10x, as long as the stop is actually filled. The danger with high leverage is that liquidation arrives before the stop, and then you have lost control of R.

Why R makes you comparable with yourself

Your account is not the same size in March as in October. Volatility in a pair is not the same in August as in January. If you trade both spot and perps, the currency amounts per trade differ for reasons that have nothing to do with skill.

If you count in R, all of that disappears. A trade from last year can be compared directly with one from today. You can add 40 trades across symbols and timeframes and get a number that actually means something: average R per trade, which is your expectancy.

Expectancy beats win rate

Expectancy is the number that decides whether your method survives time. A strategy that hits 40 percent of the time, but takes 2.5R on winners and loses 1R on losers, has positive expectancy. A strategy that hits 70 percent, but lets losers run to minus 3R, has negative expectancy. The latter feels better week to week, and still empties the account.

In currency you rarely see this difference clearly, because currency results spread for other reasons. In R you see it at once.

Three things that ruin the measurement

Moving the stop during the trade. Then you change the denominator after the trade is underway, and all your R numbers become approximate.

Calculating R after the fact. If you did not set a stop before entry, there is no R to calculate with. You can guess, but then you are measuring your story, not the trade.

Changing the risk percent with your mood. If you risk 0.5 percent when you are unsure and 3 percent when you are sure, the R units are no longer the same size in currency, and that sameness is what makes them comparable. Keep the percent fixed until you have enough data.

Start today

Pick a fixed risk percent per trade. Write down entry, stop and risk amount before you go in, and note how many R the plan is worth. When the trade is closed, divide the result by the risk amount and log the number. After twenty closed trades you have, for the first time, a measure that says something about your method, and not just about how large the account happened to be.