Day Trading Risk Management – Part 2

Position Sizing and R Multiple

so that's the first component of position sizing placing your stops and taking from the are multiple so one main thing that everyone should focus on is something called R so this is something that I focus on a lot I always say guys don't look at the final number of my trades look at what I risked to make that trade or make that amount right so if you see me make $30,000 and you see anyone make 30 grand right the first question is what did this person risk if I risk 30,000 to make 30,000 I have a one R trade now this looks great as a final number but does it really make sense for me to have 30,000 does it make sense for me to view this trade as great opposed to let's just say I made $5,000 but I risk $11,000 to make that 5 grand now this trade which is a 5r trade is a much much better trade than anything else so that's why it's really important to understand what you're risking on trades right

Examples of R in Practice

so I'll show you guys some examples so here uh we're going to look at my trade Zeller really quick let's say I go to this trade you can see that I made 25 Grand on this particular trade right now this number sounds great it's phenomenal but the main thing that we need to understand is okay well what was the r on this particular trade right it was 2.62 R how did we get to that number let's take a look at that really quick right so when we look at the the r number right we are able to understand that based on my stop based on where I this trade had to go for me to be wrong this particular trade you know yes 25,000 is the number but based on my stop which was at a120 I was risking 9600 so I risked 9600 to make 25,000 where my outcome once again was 25k risk 9600 and I ended up making a little over a 2.6 R I made 2.6 times my risk amount that is the main thing we as Traders need to care about there's nothing else that matters besides that right

Comparing Trades by R

so if I go to some other trades and I go let's say here 2.21 R I go to some other trades right 2.43 R right if I go here 3.6R right some trades are great some trades are not great so if I go to this particular trade I made. 29r right so I risked $562 but I made $162 so this trade looks great it's like wow he made $162 and I'm like yeah that's that's a green trade that someone may check off and say well this is a great trade but when I go into the logistics of the trade based on where my stop was based on if this trade went there I would have been wrong I was risking five $500 to make $162 and guys think about it long-term wise that is not sustainable because how many times do I have to be right to be able to continuously being profitable right so having an R multiple that doesn't make sense or is way off is just not going to allow you to be profitable even if you have some trades that are profitable right

Calculating R

so to go back to R how is R calculated what that is and how we can calculate it is the following way what I do for R is every time I take a trade let's say we go back to the 10 example trades at 10 I put my stop at 9 okay so because my stop is at 9 I will look at the trade outcome so I take a trade I know I'm buying this trade at 10 I know my stop is a nine meaning my risk on this trade is $1 right so because my risk is $1 I look at the trade outcome now if the trade outcome is $11 and I profit $1 I just divide the one by one which I was showing you guys in trade Z my R multiple is 1 R I made one times my risk if if I end up selling this at 12 because I made $2 on the trade and a risk one my R is 2 R if I end up going to 13 I risk $1 to make three so that's three R so that's how it works on the upside and that's how we need to calculate it

Negative R and Stop Discipline

right now on the flip side how R multiple works is the following right so when you have a red trade how does it work so it's the same exact concept you buy a 10 you put a stop at 9 now if you sell at 9 because you plan to lose lose a dollar and you lost a dollar your R is -1 R but there are instances where your R and people have asked me Umar your R not a negative 1 it's a neg3 or a negative something so when you go to this day right my R is -3.6 that's where it gets interesting right now to go into this trade my stop on this trade was a $150 okay and I didn't hit my stop on this particular trade so what happens when we have trades like this is we start going well this is what I'm risking based on my stop but this is what I lost so this happens if you don't follow your stop so if you see your r ends up being more than negative -1 R consistently that means you're not following your stop you're not executing at that number that you originally planned so I have netive 3.62 R I lost 3.62 times what I actually lost in the particular trade which is a big red flag

Importance of R

so in this particular trade that I was talking about again right we go at 10 stop at nine right if I don't sell at 9ine my stop which was my predetermined stop losing $1 right and this goes to seven and I sell at seven now I lost $3 risking a dollar so my R is a -3 R which is a big red flag flag so that's why I look at r a lot because when I look at R from a risk management point of view I'm able to identify you know am I following my stop am I making the most on my trades it also helps me look at my trades from an actual trading point of view and not a p&l point of view right because I'd rather have 10 trades where I have more than a 2 R return than have 10 trades where I made $22,000 but the return was 05 R right because think about this guys in trading we are not always going to be right it's just a given like you're going to be wrong you're going to lose money and trading is a probability game right

R and Probability

so if you have an average of let's say 3 r or even 2 R let's just say 2 r or 3 R if you have a 2 R that means you're making two times what you're risking if you're write five times out of 10 times which is 50% of times and you have a 2 R you're you're going to be profitable on a 50% win ratio now if you're win ratio is even 40% right you will still essentially be profitable because you have a good R multiple you are making more than what you're risking and that kind of changes the concept where Traders think you need to be right all the time you don't need to be right all the time you just have to be able to focus on your R multiple so that's where R is beautiful right because it allows you to look at your trades from a better point of view and it also allows you to stay profitable by being right less right and if you can achieve this to get to a higher number it allows you to make more money it allows you to stay in the game longer

Final Advice

a few words of advice that I want to leave to you guys you know depending on what stage you're at understand there's two stages right uh one stage is a Trader that's trying to find his or her way they're trying to find profitability and second is a Trader that has found an edge has found some profitability but they're trying to scale up I'm assuming most people are in stage a if you're in stage a guys keep your risk consistent Focus on R don't increase your risk size trying to find an edge and your job here is to just stay alive just be able to take as many trades as you possibly can with the least amount of risk least amount of exposure this is where you want to get practice in where you want to test your strategies test your setups and just stay alive simple as that if you're in Stage B this is where you have to be able to identify what trades require me to put on a little bit more size how do I increase size when it's needed how do I decrease size when markets get difficult how do I kind of become objective to that right moving on if you follow me if you're on my YouTube I don't want you guys to have the mindset of I made $2,000 I don't care you shouldn't care what did this person risk if you talk about a trade moving on just wire yourself to to be this way I made a 2.5 R on a trade that guy said he made 20,000 that lady said she made 15,000 what did the risk where was their stop was their stop at a good point that proved they would be wrong why was their stop there this is where we shift our mindset right we start focusing on becoming better Traders and then the money shows up automatically we don't go into trades with oh I'm going to make this much if I'm right or when I'm right no go into every trade what is my downside how much am I risking and then when you if you are right on a trade well what did I risk to make this didn't make sense and there's a lot of times guys for myself I've had days where I literally had a 30 or $440,000 day and I go back to that trade and that journal and I recap and I go well based on