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
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
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
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.
