A green trade doesn’t always mean a good or winning trade. Sure, you didn’t lose money, but the key question is: how much did you risk to make what you earned?
Before entering any trade, it’s crucial to understand how much you’re risking and have your Stop Loss amount set. Here’s a guide to help you navigate the concept of R-Multiple.
Trade Risk:
The amount ($) you’re initially risking in a trade to potentially achieve your Initial Target.
To determine your trade risk, input your Stop Loss in the Trade Tracking page, and TradeZella will automatically calculate your trade risk and Relized R-Multiple.
Initial Target:
The planned profit you had aimed to achieve from a trade.
To determine your initial target, input your profit target on the Trade Tracking page, and TradeZella will automatically calculate your initial target and Planned R-multiple.
⚠️ In Tradezella, for option trades, your Stop Loss and Profit Target needs to be set based on the option price chart, not the underlying stock price.
Planned R-Multiple:
Formula: Initial Target / Trade Risk
This metric shows how many times your trade risk you are planning to earn.
Ideally, you should aim for a Planned R-Multiple of 2 or more, but anything above 1R is acceptable. If it’s equal to or lower than 1R, consider lowering your Trade Risk.
Realized R-Multiple:
Formula: Net P&L / Trade Risk
This metric represents the outcome of the trade in terms of your risk.
Ideally, you should aim to meet or exceed your Planned R-Multiple, especially if it’s 2R or more.
Best Practices:
Set Your Stop Loss: Before entering a trade, have your Stop Loss set at a level where your trade would be proven wrong. Record this in your trade recap.
Plan Your Profit Target: Aim for your profit to be at least 2x the amount you’re risking.
Additional Resources:
Understanding and applying the concept of R-Multiple can significantly enhance your trading strategy. By focusing on the relationship between risk and reward, you’ll be better equipped to make informed decisions and improve your overall performance. Always remember to plan your trades with a clear risk and reward ratio in mind, and use TradeZella’s tools to track and analyze your progress.
Need further support? Contact our support team at support@tradezella.com