R Multiples In Action

R multiples are one of the key tools of the successful trader. You're simply not going to get rich (which I know all aspiring traders want) if you cannot hold out for the big wins.

And R multiples are the way we measure the success of those wins.

I have an aversion to setting  profit targets  because they run contrary to sound money management principles, such as letting profits run (with a sensible stop loss strategy of course).

So in this post, I'll show you some R multiples in action; by way of three of my (better) trades of late.

When calculating R multiples we always assume 100% risk.

No, this doesn't mean betting the ranch on one trade.

It means slicing up total capital into portions, preferably 3% or less. And then assuming each represents 100%.

 

The R multiple formula

In the following examples I'm not going to discuss either money or contract sizes.

It will only confuse.

Instead, I'm going to use pips at risk and pips profit only to show you how R multiples work.

For long trades the formula is:

Pip risk = entry price – stop loss

Pip profit = selling price – entry price

R multiple = pips profit/pip risk * 100

For short trades the formula is:

Pip risk = stop loss - entry price

Pip profit = entry price - buying price

R multiple = pips profit/pip risk * 100

Enough theory. Below are three of my trades, 2 stock CFD trades and one currency pair.

 

Netflix 15/6/20

I entered at 426.62

My stop loss was at 414.18.

Giving a point risk of 12.44

I sold at 464.36

Points profit = 464.36-426.62 = 37.74

R multiple = 37.74/12.44 * 100

R multiple = 303% or 3R

Netflix

 

J P Morgan 1/6/20

I entered at 99.63

My stop loss was at 97.44

For a point risk of 2.19

I sold at 111.12

Points profit = 111.12-99.63 = 11.49

R multiple - 11.49/2.19

R multiple - 524.65% or 5.2R

JP Morgan

 

AUD/USD 25/5/20.

Calculations become slightly trickier with currencies. The last figure of a currency value (for most currencies) we can ignore.

And the first figure behind the decimal we can often ignore too.

I entered at 0.65532

My stop loss was placed at 0.65190.

For a pip risk of 34.

I sold at 0.69669

Pips profit = 0.69609 - 0.65532 = 407 pips

R multiple 407/34

R multiple = 1197.06% or 11.R

AUD/USD

 

Final thoughts

Not all trades are going to have great R multiples like this.

There are going to be losses along the way. Some of which will be 100% of the total risk (1R)

But... if you follow the old adage of cutting losses short and letting profits run, over time, the maths will work.

 

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
Posted in Money Management.

John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.

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Xiao Ryan
Xiao Ryan
11 days ago

Seeing examples really help! Otherwise they are like tea leaves to read. I’ve been reading and re-reading your posts. US option trading might be different but the short term trends are the same. Glad your Netflix trade was before its big drop!