Q: I am eagerly working through The Definitive Guide to Position Sizing. Unfortunately, I am having difficulty calculating 1R. I am a currency trader, so it seems to be easier for me to calculate everything in pips.
I do enough intraday-charting; I manually move my stop loss in order to protect at least 15 pips as soon as the trade turns positive. How do I calculate that?
Let’s say my initial stop is 90 pips away, and my initial target is 120 pips away from the entry price. In a few hours my trade looks good, so I move my stop 15 pips above the entry price (worst-case scenario = plus 15 pips). Then, I eventually decide to close for a profit of 50 pips.
Now, the profit is clear, but what shall I consider as my stop loss, the initial one or the new one (which is the actual profit)?
A: 1R for a trade is always the amount that you put at risk initially in a trade—the distance from your entry price to your initial stop price.
If your initial stop was 90 pips away from your entry price, then 1R = 90 pips. If your target is 120 pips away from your entry, then you are looking at a +1.3R trade if the price gets to your target. If you exit at your initial stop, then you will have a -1R trade.
Moving your stop to reduce your loss or lock in a profit does not affect your 1R but managing the trade and evaluating its results can all be done in terms of 1R. When you move your stop to 15 pips above your break-even point, that would be a 0.17R trade if 1R = 90 pips. Exiting with 50 pips of profit means you had a +0.55R trade, if 1R = 90 pips.
Evaluate the trade in terms of your initial risk amount rather than where the stop was most recently set.
—RJ Hixson
