R is simply the ‘dollar risk per trade’, or can be defined as a “fixed unit of Risk”. It’s nothing but a reward-to-risk ratio. If you risked $100 on a trade, and then made $200 dollars after the trade was closed, you made a 2 R profit. Conversely, if you stopped out of the play at your pre-determined stop (and assuming you share-sized properly), then you lost your original risk-amount, or 1 R.
“The golden rule of trading is to keep losses at a level of 1 R as often as possible and to make profits that are high R-multiples.” ~ Dr. Van Tharp of “Trade Your Way to Financial Freedom”. To read more on “R”, view this article:
Posted in: Trading Terminology (general product terms)