Lesson T2.3 · 3 of 5 · Risk before every trade
R multiples and expectancy in trading, explained simply
1R is a trade’s initial risk: what you lose if the stop-loss is hit. Expectancy tells you how much you make or lose per trade on average, in R: the win rate times the average win, minus the loss rate times the average loss.
Terms in this lesson
- Stop-loss
- An order that sells automatically if the price falls to a level you choose.
- Maximum drawdown
- The largest fall in price from a peak to the lowest point after it.
What 1R means in trading
Definition
What is 1R?
A trade’s initial risk, in money.
If you buy 200 shares at $25 with a stop-loss at $24, you risk $200. That is 1R. A $600 gain is +3R, a loss at the stop is -1R, and getting out halfway to the stop is -0.5R. Measured like this, trades of different sizes can be compared.
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Create a free accountExpectancy: how to calculate it
Definition
What is expectancy?
How much you make or lose per trade on average, in R.
The formula: win rate × average win - loss rate × average loss. Example: 40% of trades win 2.5R on average, the other 60% lose 1R each. 0.4 × 2.5 - 0.6 × 1 = 1 - 0.6 = +0.4R per trade.
Result: +0.4R per trade, before costs.
Over 100 trades, +0.4R means +40R on average. With 1R = $100, that is about $4,000 before costs. But an average is only an average: the path runs through losing streaks, and the figure comes from the past and can change.
Why the win rate alone tells you nothing
Expectancy per trade for three strategies: A, with 80% winners, has -0.04R; B, with 50%, has 0R; C, with only 40% winners, has +0.4R.
- A: 80% win 0.2R each, 20% lose 1R each. 0.16 - 0.20 = -0.04R.
- B: 50% win 1R each, 50% lose 1R each. 0R.
- C: 40% win 2.5R each, 60% lose 1R each. +0.4R.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: the lesson’s own calculations; the losing-streak probability is calculated exactly for 100 independent trades, each with a 60% chance of losing.