Risk Management & Position Sizing

R is the amount you decided to lose on a trade. Not the notional value of the position, not the margin — the distance from entry to stop, expressed in money. Once that number is fixed, every outcome can be written as a multiple of it. Risk 1R and take profit at twice the stop distance, and a full win is +2R. Get stopped out and it is −1R. Close early at half the distance and it is +0.5R.

The point of the unit is comparability. A £40 loss on gold and a £40 loss on an index are the same event if both were 1R, even though one moved 11 dollars and the other moved 37 points. It also removes account size from the conversation: a +2.4R result reads identically whether the account is £500 or £50,000, which is why the journal reports outcomes in R and not in currency.

Expectancy is what R makes calculable. Expectancy per trade = (win rate × average win in R) − (loss rate × average loss in R). Worked through: suppose across a sample you win 40% of decided trades, your average winner is +2.2R, and your average loser is −1R. Expectancy = (0.40 × 2.2) − (0.60 × 1.0) = 0.88 − 0.60 = +0.28R per trade. The same 40% win rate with an average winner of +1.2R gives (0.40 × 1.2) − 0.60 = −0.12R — the identical hit rate, the opposite conclusion. This is why 'what is your win rate' is close to a meaningless question on its own.

Two consequences follow. First, a losing streak is arithmetic, not a verdict: at a 40% hit rate, four losses in a row occurs roughly 13% of the time in any given four-trade window. Second, expectancy is only meaningful over a sample large enough to contain those streaks, so judging a method on ten trades tells you almost nothing. The numbers above are illustrative worked examples, not results or projections.

Apply it to the AUD/USD entry linked below: the plan carried a 2.0 R:R, the trade was stopped, and the journal records −1R. The loss was exactly the size the plan authorised — which is the only part of the outcome that was ever under the trader's control.