Do you think of using a tool to keep a check on your discipline while you are trading?
You will argue, that the screaming losses are the best tool to let us know that we are not following our rules of Risk Management or somehow we are derailing from the discipline.
Discipline is the basic requirement to be successful for a trader. You must have encountered many times while in a trade, that either you booked your profits too early or you took too long to exit a losing trade. When the trade is closed, you come to know about your mistakes and this is a repeat mistake / error almost every time.There comes the requirement for a tool which can check; whether we are following discipline in our Entry & exits or not.
R-Multiple is a technical tool, which keeps a track on whether you are following your discipline or not. It is very helpful for the traders who keep on holding their losing trades and take early exits from their profitable ones.
To understand R-Multiple, we have to first understand what is Risk Reward Ratio (RRR).
Risk-Reward Ratio (RRR):
“Traders often use this approach to plan which trades to take, and the ratio is calculated by dividing the amount a trader stands to lose if the price of an asset moves in an unexpected direction (the risk) by the amount of profit the trader expects to have made when the position is closed (the reward)”- (Source: Investopedia)
In this view, the trader assesses the situation before entering into a trade. However, this is what he expects from the trade. Real problem starts when the trade is on. Many factors come into picture which make him vulnerable to hold the trade when in profit or to hold the same unnecessarily when he is in loss. And a good trade ends in a disaster.
RRR is basically a tool which calculates the potential reward which may be earned while taking a potential risk. This is assessed before entering into a trade. So if the RRR of a trade is 2, that means, a trader perceives a reward of atleast Rs. 2 in a trade to ensure that he doesn’t lose more than Re. 1 in that trade, if goes against him.
The main problem is that it’s a part of planning and doesn’t play any role during the execution/ duration of the trade. A trade may have 2:1 Reward to Risk Ratio, but still during the trade, the trader may be in a losing position due to bad trade management like early exit from a gaining trade or holding a losing trade for too long. So, it becomes necessary for a trader to keep check how he remained disciplined during a series of trades while in a trade or how he destroyed his 2: 1 trade. Hence, R-Multiple comes into picture.
R- Multiple: What is this?
R stands for “Risk” in the term. R- Multiple is a metrics of your performance which measures the outcome of the trade in terms of Risk. Let’s understand this with an example:
Entry : Rs. 100
SL : Rs. 90
Tgt : Rs. 120
In this case, the RRR is 2:1
i.e. Potential Profit / Potential Loss
(120-100) / (100-90)
The trader expects to earn Rs. 20 for each asset against a risk of losing Rs 10 per stock, if he goes wrong.
But suppose, if he actually exits from the trade at
Then the R-Multiple in each case shall be-
R-Multiple = (Exit price- Entry Price) / (Entry Price- Stop Loss)
a) (80-100)/(100-90) = -2
This indicates that due to hope, trader is not getting out of the losing trade. He has skipped his SL, which is dangerous for him in long term.
b) (90-100)/(100-90) = -1
This indicates that trader is following his rules of SL and is out of the trade as soon as his SL price is reached.
c) (100-100)/(100-90) = 0
This indicates that the trader is able to sense the situation that he has taken a wrong trade and exits at cost. It may be a good sign for a trader, if we are not confident about a trade we took, we should try to get out from the same ASAP. However, it shows lack of confidence also as the trader might not be confident about his trade and got out.
d) (120-100)/(100-90) = 2
This indicates that trader is following his rules of SL and target and is out of the trade as soon as his target price is reached.
e) (130-100)/(100-90) = 3
This indicates that the trader is mature enough to ride his winning trades and have brighter chances of becoming a successful trade in long term.
Points to remember:
1. Always compare the R-Multiple to RRR. If RRR is more than the R-Multiple of the trade done, it means, either the RRR is not set right out of over-optimism or trader is getting out the winning trade early or holding the losing trade.
2. If R-Multiple is less than -1, it means the trader is not following his stop losses, which is sign of danger for him.
Every trader must ensure to include the Column for R-Multiple in his log sheet. So that he can keep checking how much he is disciplined during the trade.
To make the things more easy, I am giving you the link of the trade journal/Log sheet which includes the R-Multiple column also. The same can be used to have a better understanding of the concept discussed here and also for keeping logs of your trades.
Thanks for taking out time to read the article.