R in trading: what it is and why it matters more than win rate

What is R in trading

R is a unit of measure of risk. Before entering a trade you decide where to put the stop, that is, the price at which the position closes by itself to limit the loss. The amount you would lose if the price reached that stop is 1R. Everything else is measured with that yardstick.

If you risk €20 and the trade closes at the stop, you made −1R. If it closes with a gain of €40, you made +2R. If it closes with a loss of €10, you made −0.5R. The value in euros changes from one trade to the next, R does not: it always says «how well or badly it went compared with what I had planned for».

How to calculate R, step by step

1. Take the entry and the stop. The distance between the two is the risk for every unit you buy.
2. Multiply by the quantity. The result is the maximum expected loss: that is 1R.
3. When the trade closes, divide the result (in euros) by 1R. The number you get is the result in R.

Illustrative example: you enter at €100 with the stop at €95 and buy 4 units. The risk is €5 × 4 = €20, so 1R = €20. If you exit at €110, you gain €10 × 4 = €40, that is +2R. If the price falls to the stop, you lose €20: −1R. The numbers are made up to explain the calculation and are not the result of any system.

Why the win rate alone is misleading

The win rate is the percentage of trades closed at a gain. It looks like a good indicator, but it does not say how much you gain when you win and how much you lose when you lose. Look at two example systems, each over 100 trades:

System A wins seven times out of ten and still loses. System B loses six times out of ten and ends up positive. Whoever looks only at the percentage picks A, and that is an expensive mistake.

What expectancy is and how to read it

The number that sums it all up is the average result per trade, in R, also called expectancy. It is calculated like this:

(probability of winning × average gain) − (probability of losing × average loss)

In the example: system A has 0.7 × 0.3 − 0.3 × 1 = −0.09R per trade; system B has 0.4 × 2 − 0.6 × 1 = +0.2R. A value above zero means that on average, over many past trades, each trade returned more than it risked. Below zero, the opposite. It is not a forecast of what will happen: it describes how it went, and only if the sample is large enough.

R and costs: the detail many forget

Commissions and funding (the periodic payment between those who are long and those who are short on perpetual contracts) reduce every result. A system that closes at +0.05R before costs can end up below zero after paying them. That is why the result in R should always be read net of costs: if whoever shows you the numbers does not say so, ask.

How many R you need for the numbers to add up

The practical rule is the relationship between the win rate and the ratio between gain and loss (the R:R). To avoid losing on average, you need at least this:

The formula is simple: the break-even win rate is 1 divided by (1 + average gain in R), before costs. It is break-even, not a gain: above that threshold the expectancy is positive, below it is negative. With distant targets you can lose more often than you win and still be fine, but you have to endure long losing streaks.

What R tells you about the risk you are taking

R also serves to decide how much to risk. If on every trade you put 1% of the account at stake, each loss at the stop is worth −1% and ten losses in a row are worth about −10%. If instead you risk 10% per trade, ten losses are enough to wipe out almost everything. Setting in advance what 1R is worth, as a percentage of the account, is the choice that decides whether a normal series of losses is annoying or fatal. No system avoids losing streaks: you can only make them bearable.

The most common mistakes with R

• Moving the stop further away once the trade is open. The loss becomes bigger than 1R and the statistics no longer add up.
• Comparing results in euros. A loss of €50 can be −0.2R or −5R: it depends on how much you had planned to risk.
• Judging on a few trades. Five trades say nothing: you need dozens, better hundreds.
• Ignoring costs. Count in R, net of commissions and funding.

How to use R with STA

Every STA card has an entry, a stop and a target, so you can work out yourself what 1R is worth and what the target is worth in R. There is a stop on every card, so you know before entering how much you can lose. The calmest way to practise is the free DEMO: follow the cards with virtual capital and real prices, note the result of each one in R and see how the average behaves after a few weeks.

In short

• 1R is what you lose if the price touches the stop.
• Every result is measured in R, so trades of different sizes can be compared.
• The win rate alone is not enough: it must be read together with the average gain and the average loss.
• The average result in R, net of costs, tells you how it went so far, not how it will go.
• Deciding in advance what 1R is worth on your account is the first step to coping with losing streaks.

Frequently asked questions

This article is for information only and is not investment advice. Trading crypto-assets involves a high risk, including the total loss of the capital used. Numerical examples are for illustration.