Calculation and mechanics
For a stock trade with a stop, the initial risk is the distance between entry price and initial stop multiplied by the quantity. For futures the contract multiplier is added. Buying 100 shares at 50 with a stop at 46, for example, puts the planned risk at 400 and thus 1R = 400. If the trade is closed with a gain of 1,000, that is +2.5R. A loss of 200 is -0.5R.
What counts is the risk set at entry. A stop trailed later does not change 1R. This keeps the yardstick constant over the whole trade and makes the results of different trades comparable. Without a clearly defined initial risk no unambiguous R-multiple can be calculated.
The average of all R-multiples equals the Expectancy in R. The distribution of the values also shows whether losses typically stay limited at around -1R or whether single trades exceed the planned risk, for example through price gaps or slippage.
R-multiple = result / initial risk, with a stop: |entry price - initial stop| x quantity x multiplier
Distinction
The risk/reward ratio, in German-speaking countries usually abbreviated CRV, mostly refers to the ratio planned before entry between the possible gain up to the profit target and the possible loss down to the stop. The R-multiple instead looks at the actual result of the closed trade relative to the original risk. A trade can be opened with a planned risk/reward of 3:1 and still end at +1.5R, -1R or another result.
MAE and MFE can also be expressed in R. They show how far a trade moved against or in favour of the position along the way, while the R-multiple describes the result at exit.
Related terms
- Expectancy (Average result per trade, expected value)
- MAE and MFE (Maximum adverse excursion, maximum favorable excursion)
- Win rate (Hit rate, percent profitable)
- Max Loss (Maximum loss, option max loss)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.