To put it simply, the R multiple represents the dollar amount that you risked for each trade. Mentioned by Dr. Van Tharp in his book, “Trade your way to Financial Freedom,” the R multiple is a powerful tool that you can use to accurately track the performance of your trades.
Ok, so let’s say I’m risking $100 per trade. My R multiple would be the net gain of the trade divided by $100.
My net performance after these three trades can be seen by taking the sum of the 'R Multiple' column, which is +1.5 R. When multiplied by $100 it equals $150.
But more importantly, the R multiple is a way to receive honest feedback on trades across different risk parameters. Let’s say you place two trades. The first trade you risk $500 and the second you risk $1000. What if the trades turned out like this:
Hooray! You netted $500, you must be a great trader! Well, guess again! Your loss was double your intended risk, while your win was only half. See! The sum of your R multiples is -0.5 R. Now you can see how you’re really performing even if you’re changing your risk for each trade. It kind of equalizes everything, you know?
This is why in my 'Trade Analysis,' I publish the result of my trades in terms of its R multiple. This way, you the reader can get a clearer picture of how I’m doing and can apply these trades to your own risk tolerance.
Make the shift and think of your results not in terms of how much money you made, but on your R multiple. Did you know, even world renowned trader Richard Dennis used the R Multiple when raising his turtle traders? Each morning he gave them a slip of paper with the "R of the day," the amount they were to risk. It doesn't hurt to take a lesson from one of the greats!