Q: I have just read your wonderful book Super Trader and it helped me tremendously in my trading business. Just wanted to say thank you for this great book, which gives good advice not only for trading but for one’s entire life.
That being said, I have a question regarding 1R in relation to my system. How do I change the value of R when I move my stop-loss to breakeven level or above? It is impossible to set it to zero in to my Excel spreadsheet because a calculation of system quality would be impossible (division by 0!).
A: Generally, I use the term R in two ways. R is the amount that you risk when you open a trade. Once you are in a trade, the initial risk R never changes—it’s set just like the entry price for the trade. In closing a trade, I often shorten the term “R-multiple” to just R, which refers to the trade result in terms of the initial risk (e.g., a 3R winner or a -1R loser).
You can also apply the concept of R to determine the current reward to risk in a trade as you adjust your stop. In that case, R is the open risk (between the current price and your stop) and the reward is the difference between the current price and your potential target. In this case, your initial R does not change, but you adjust your stop to continuously manage your potential reward to open risk ratio. When you close this kind of trade, you will still record the R-multiple in terms of initial R.
