Hi all.
I have recently come across threads where Risk:Reward is expressed as a simple R figure, eg R25. How does one calculate this?
I assume the risk part is 1, so is only the reward part expressed?
Say for example a trade used lot sizing of 1 and made $200 - the drawdown was 10 pips…How does one express that in a single R figure?
Drawdown (10 pips, in your example) [B]does not[/B] figure into R.
But, [I]realized profit[/I] might, depending on the way R is being discussed.
We need to back up a step.
The original (and simplest) definition of R is just a shorter and easier way of specifying a Reward:Risk ratio.
That is, R:R=TP:SL. And R=TP÷SL. So, for example, if TP=70 pips and SL=35 pips, R:R=2:1, and R=2.
Typically, it’s expressed as 2R.
Notice that this definition is based on the ratio of [I]anticipated profit (i.e., TP) to SL (risk).[/I]
Another way to use the term R is to relate [I]realized profit to SL.[/I] So, for example, in the trade described above (TP=70, SL=35), if the trade is closed with an actual profit of 60 pips (instead of the anticipated 70 pips), then it can be said that this trade resulted in 1.7R (that’s 60÷35, rounded off).
When R is mentioned, usually we can tell from context whether it refers to anticipated profit (TP) ÷ SL, or to realized profit ÷ SL.
Finally, R can describe a group of trades, as in [I]“My trades over the past 6 months have averaged 1.3R.”[/I]
If it isn’t clear from context whether that statement refers to (1) [I]how those trade were planned,[/I] or (2) [I]how those trades turned out,[/I] then we have to inquire.
.
1 Like
+1 on what Clint said, nice explanation.
Thanks for your explanation - it is crystal clear now. Is there a way that one can (quickly) see what your r:r is with current trades? perhaps a script or something.Or must one manually calculate this?
I know on myfxbook it only gives you the r:r for completed trades.
Here is an extract of the thread I am reading.
[I]“Now when we get to a profit of 2.5R on any timeframe, we need to reduce the SDC to a width of 0.5 as shown below.”[/I]
I’m not aware of any indicator that computes R in real time for open trades, or computes a single fixed price, such as the price corresponding to 2.5R that you referred to, above.
I guess if you were to create such an indicator, you would want it to calculate the price corresponding to 2.5R (given your entry price, and your stop-loss), and then set an alarm that would notify you when that price is hit.
But, I don’t code, so I can’t help you here.
.