R Multiple – Secret To Profitable Trading (Risk Management Trading) πŸ”₯

– [Instructor] Welcome
to the video series on risk management in trading. In this series, I will be
covering money management and risk management
in great depth. So in this particular part, I will be discussing
another important concept in risk management, that is importance
of knowing R multiple in your own trading strategy. After finishing this part, you will have good
understanding of how R multiple can be used to maximize profits and minimize losses
in stock market. So, let’s get started. In the previous video
on risk management, we did look into risk
of ruin in detail. In case have you
missed that video, link to the same would come up at top-right end of your screen. In this particular part,
I will be explaining why R multiple is so
essential in trading. I’ll be showing you how
to calculate R multiple and how to interpret
R multiple data for better risk management. I’ll also be introducing you to the concept of
R multiple total and how you can use this data to select trading
strategy in the market. Towards the end of this video, I’ll also be sharing
some practical insights into using R multiple
to exit trades, and how you should mark
R multiple on charts to help you get perspective
of the underlying trade. I’ll also strongly
recommend for you to read “Trade Your Way
To Financial Freedom”. This is a book written
by Dr. Van Tharp, and this book gives
you good insights into managing risk-reward
while trading. Now, I have put out
the link for the book in the description box below and in the comment
section below. So let me now show you how to calculate R
multiple in trading. This calculation is very easy and can be easily replicated
in an Excel sheet. To calculate R multiple, you
would require two data points. Number one, profit
or loss per trade, and number two, risk
taken per trade. In this example, if you
see, entry price is 100, stop loss is 80, and
exit price is 140. Initial risk is defined as
entry price minus stop loss, that is 100 minus 80
which equals to 20>Profit of this particular trade is exit price minus entry price, that is 140 minus
100 which equals 40. So R multiple here would
be 40, that is profit, divided by 20, which
was the initial risk. The final value therefore
comes out to be two. I hope this particular
calculation is clear. So let us now understand how
to interpret R multiple data and why it remains
the key to success in risk management in trading. In this chart, entry price,
stop loss, and exit price is given out in the
first three columns. Data for risk in figures,
risk in percentage terms, and total trading capital is given out in column
four, five, and column nine. Data for profit and
loss is given out in this particular column. So based on this data, R
multiple for each trade is calculated as profit and loss divided by risk taken per trade. If you look at the
first trade here, R multiple is given out as 0.34. This means you risked 6,000
to make a profit of 2,055. Therefore, your
returns were 0.34 times the initial risk that you took. I hope this is clear. If you look at the
second trade here, in this particular trade, you risked 3,800 to
make 7,800 as return. In terms of risk, therefore,
you made 2.07 times of the initial risk
you took in this trade. I hope the interpretation
aspect is clear. Now, one of the advantages
of calculating R multiple is that you’re always
measuring your profit or loss with respect to the initial
risk you’ve taken in the trade. Now, this is extremely useful as you will be more
careful in your trading and you will be disciplined and will have a
systemic approach when it comes to
risk management. So this chart that you see
is the same R multiple data that we saw in the
previous slide. So I have plotted
the data for you to understand how R
multiple data looks like in real life trading. Out of these all 20
trades that I’ve shown, look at how many time
one loses in the market. You need to ensure
that you don’t lose too much money
during these phases. This is absolutely crucial. Most beginners in the market
lose more in loss making trades and make less profits
in profitable trades. Therefore, you need to ensure
this does not happen with you. In this example, R multiple, if you see during
loss making trades is between -0.49 to -1.17. If you look at the
profitable trades data, most of the R multiple data
ranges between 0.34 to 0.52. There are just three trades
that you can see here that have R multiple above two, and then there is this one trade that has R multiple of eight. Now, this is what happens
in real life trading and this the main reason why consistency is so
important in trading. There are just few trades that
change the entire landscape of your portfolio, and during
such phases that I’ve marked, you need to ensure
that your profits run and you don’t sell
out too early. During the other phases,
you will incur losses, and this is where you
need to be proactive in order to protect
your existing capital. At all times, you should aim for your losses to
remain under one R, whereas your profits should
be as high as possible in terms of the risk taken. This, in my opinion, is
the golden rule of trading that very few
traders understand. So let us now understand the
concept of R multiple total. This is again a very important
concept in risk management and therefore, do
watch this closely. In your current
trading strategy, make sure you take data
for at least 100 trades and then compute
R multiple value like I’ve shown in
this Excel sheet. Once you compute the
R multiple values, add this data and compute
your R multiple total like I’ve shown here. Now, computing this data point
is important on two counts. Number one, this is
required to learn how much you will earn
over the next 100 trades in terms of your initial risk. And number two, this
will help you decide if you should be trading
this current strategy. In this example if you see, total R multiple
for 20 trades is 12. Due to space constraints, I could not post
data for 100 trades, but for 100 trades, the total
R multiple value was 67. As a trader, knowing
this is extremely crucial as I would know that if I stick with this strategy
for 100 trades, I do stand a chance
to make 67 times of my initial risk in trades. So this would help
me remain calm in phases where trades are
not working in my favor and I would continue
to execute trades in a disciplined manner. I hope this crucial point about R multiple
total is now clear. So let me now explain how R
multiple can help you choose from different
trading strategies. Now, as a trader,
it is very common to have multiple strategies, and hence, the question remains, how to short list which
strategy to trade. If you’re beginning
in the stock market, then use the combination
of drawdown and R multiple. So drawdown is marked here and R multiple data is in
this particular column. Now, as a trader, you should
choose such a trading strategy where drawdown is minimum but R multiple over
100 trades is maximum. So before heading forward, let me take few seconds to
explain what drawdown is. In this chart, I have
plotted cumulative profit and loss of trading portfolio. Now, drawdown is the difference between high of
the trading account and low of trading account that is expressed
in percentage terms. So this actually represents how much a trading strategy
can lose in market, and hence, this is an
important metrics to track. So if you look at this example, System A has drawdown of
10%, and R multiple is at 35. If you look at System
B, drawdown is at 7%, and R multiple is at 33. So if I have to select
between System A and B, I would actually
prefer Trading System B based on the combination
of drawdown and R multiple. In this entire
example, if you see, I would prefer System J because it has a
drawdown of just 7%, whereas R multiple is at 41. I hope this advantage
of R multiple is clear. So let me now show you how R
multiple distribution chart can be immensely helpful
when you need to exit trades. Based on the example
in front of you, I would know that
average R multiple for this trading strategy,
that is for winning trades, is between 1.5 and 2.2. For all loss-making trades, average is between
-0.6 and -0.9. Now, in real time trading, if I get a trade that
gives me 3R return within the next
few days or hours, I would be inclined to book
out on some profits at least, as R multiple of
trade is clearly above the average R multiple
of this trading strategy. I hope this important
point is clear. Now, if I get a trade that
is not working in my favor, I would know when to exit it by looking at the
historic R multiple for loss-making trades. Under no circumstance would
I want to take more loss than historic average
loss of trading strategy based on R multiple data. This is again a key
rule in risk management, and therefore, do
take not of this. In this particular example, if I find R multiple
of trade below -1, I would immediately
reduce my position size or would entirely book loss
on the particular trade. Let me now show you how I mark out R multiple
data on the chart, and this is something I do
for each and every trade and this definitely helps me out in overall risk management. Let us assume I am taking
entry at this level and I have marked
the stop loss here. So the difference between
entry and stop loss would be my initial
risk that is R. Once I have taken entry
in the particular stock, I then mark out 1R, 2R,
and 3R level on the chart. So as trade progresses, I constantly take note profit
in terms of R multiple. This actually helps me get a
overall perspective on trade with respect to the initial
risk I have undertaken. In this chart, if you see, even though price is rallying
at this particular point, I would be inclined to book
out some profits at least as trade is already giving me three times of
what I have risked. So if you’re someone
who’s new to trading, I would strongly
recommend for you to start marking out
this on the chart. That is multiple R levels. You’ll immediately
see a difference in your overall thought process and this will help you
exit trades better. So let me now explain how you should be proceeding
forward with R multiple. So to calculate R multiple, you can either use
Microsoft Excel or you can use softwares
like Trading Blox which actually help you
calculate R multiples for many trading
strategies at once. In my own opinion, Microsoft Excel is more than
enough to compute R multiple, it is just that it
takes a little more time to get the results as there is a lot of manual work required. In case you want R
multiple Excel sheet, do let me know in the
comment section below and we will email it to you. As far as R multiple
is concerned, your entire focus should be to keep R multiple
of loss making trades between -1R and zero. So once you finish
computing R multiple data and drawdown statistics, do let me know in the
comment section below for my feedback on the same. So kindly consider
hitting the like button and sharing this video
if you find it useful. Thanks a lot for watching
this video, guys. Take care and be safe.

21 Replies to “R Multiple – Secret To Profitable Trading (Risk Management Trading) πŸ”₯”

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  2. Thanks for clear crystal explanation.
    Made one mistake today, exited @ 1.2 R multiple which could have been 4.
    I had taken short trade on reliance today.

  3. Hi sir, thanks for the valuable content. Kindly make some videos on harmonic trading strategies…. thanks in advance sir….





  5. This vedio will make us more discipline for sure. Thank you Sir. The base lone is, make more profits and less losses, as simple as that.

  6. Wonderful explanation with the help of excel sheet & bar charts.

    You have made highest efforts to ensure that the viewer has understand the importance of title of the video. " R" Multiple…

    Thank you for knowledge sharing.

  7. If it suits you suggest make a single link wherein a viewers can find all the useful Excell sheets by there name which can be downloaded from your site.

  8. I wish someone explained this as clearly as you did here five years ago. I make numerous trades with small profits and exit one trade that wipes out the principal! Thanks for sharing though I have become more cautious and exiting with losses.

  9. can you suggest the better strategy according to your experience, trailing the stoploss until it got hit or reasonable take profit percentage?

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