Stop losses and R-multiples
Measure every trade in R, the amount you risked, to see whether your exits are working.
R is the amount you planned to lose on a trade. If you risk USD 100 and make USD 250, that trade made 2.5R. If you lose USD 100, it was -1R. Measuring in R removes account size from the picture and shows the quality of your decisions.
Why R beats money
- A +2R trade on a small account and a +2R trade on a large account are the same quality of trade.
- Average R per trade, called expectancy, tells you whether a strategy is worth trading.
- A loss bigger than -1R means the stop was moved, missing, or skipped by a gap.
Expectancy in one line
Expectancy = (win rate × average win in R) − (loss rate × average loss in R). A 40% win rate with 2R winners and 1R losers gives 0.4 × 2 − 0.6 × 1 = +0.2R per trade. Positive expectancy is what you are looking for, not a high win rate.
Alchemyfolio works out R for every trade that has a stop loss. Trades without a stop cannot be measured in R, which is one more reason to always set one.