The R-coefficient: assessing the success of your trading
Let's ask several traders how much they earned in a month on the foreign exchange market. One will answer that his monthly profit was 1000 dollars, the second - 700, and the third - 500. From this it can be concluded that the first trader is the most effective. But this way of estimation is far from professionalism and is one-sided.
What is the right way to evaluate the success of your trading? In this case the R-coefficient comes to the trader's aid.
Profit and risk assessment
To begin with, here is an ordinary situation: there are two traders trading in the foreign exchange market. Each of the traders has closed a profitable deal with a profit of 100 points. It would seem that the trades are equal, but to understand it, it is necessary to delve into the details:
- profit on the trade of trader №1 was 100 pips, at that a stop loss was set at the rate of 50 points;
- The profit on the deal of trader number 2 is equal to the same 100 points, but stop-loss was set in the amount of 300 points.
If you look at the usual trading statistics, these trades will not differ at all, because they brought the same amount of profit in pips.
That's the whole point of the problem - estimating the statistics leaves out the amount of money that was at risk.
For this reason, the assessment of trading efficiency in terms of the volume of profits received is one-sided. A clearer picture is given by the assessment of the risk premium.
For the first trader it was 2 to 1, and for the second trader it was 0.33 to 1. As they say, the difference is evident - the risks of trader 2 as much as six times more than trader's risks #1!
It is for determining the risk premium that the R coefficient is used.
What is the R factor?
Under the symbol R means the size of the potential loss, which the trader can get in one trade. Roughly speaking, R - is the size of the stop-loss order, which can be expressed in pips, in the deposit currency or percentage.
As a rule, this value is expressed as a percentage in relation to the current deposit. The acceptable level of risk for one trade is considered a range from 2 to 5% of the available deposit.
We will consider minimal risks - this means that the value of R will be equal to 2%. For example, the trader has a deposit of $10,000. Accordingly, the maximum loss value for one transaction will be $200. That is, if the stop-loss value will exceed R=200 when planning the deal, then such a deal cannot be opened - the trader cannot afford to lose more money than is allowed by the calculations.
Having received a loss of $200, it is considered that the trader has lost 1R. At the same time, if the trader received a series of losing trades, and the deposit is less than 10 thousand dollars, the methodology for estimating the R coefficient implies that the value of the potential loss remains unchanged at $200.
Multiplicity of R coefficient and maintaining statistics
For one transaction everything is simple enough and will not cause any difficulties for the trader if he has a knowledge of mathematics in high school. However, the problems begin when calculating a large number of transactions on a daily basis and keeping trade statistics.
Don't get upset - in fact, everything is much simpler than it seems. The R-coefficient is applied to each individual transaction, and to keep statistics it is used total R-factor.
In practice it looks like this. The trader opened a trade and set a stop loss of R=200 dollars. However the price has not yet reached the stop-loss, but the trader has already realized that his forecast was wrong. Naturally, there is no point in waiting for the deal to be closed at the stop loss. Suppose the trader closed the deal manually with a loss of $50. Its result is entered in the statistics: -0.25R = profit / risk = -$50 / $200.
The profit is displayed accordingly. For example, a trade was closed manually without reaching take profit, with a profit of $342. The statistics show the result: 1.71R = profit / risk = $342 / $200.
Subsequently, the indicators for each transaction are added up. As a result, the trader receives an indicator that reflects the level of profit received in relation to the set level of risk. It gives an opportunity to evaluate objectively the effectiveness of trading, than just the values of the received profit or loss in points or in the deposit currency.
Conclusion
As one of the members of the forum of traders says forexsystemsru.com"I came for the money, not to be clever". It's possible that many would agree with him, considering the method too academic and not wanting to bother with any calculations, focusing on the choice of a profitable trading strategy, the search for indicator-Grail and 100%-profitable robot.
Unfortunately, neither the other nor the third will give the trader answers to the questions
- How profitable am I trading?
- How good is my trading strategy?
- Am I even a good trader?
It is the use of the R-coefficient will allow you to find the answers you need, to increase the efficiency of your trading, to adequately assess and manage your trading risks.