Is it all about money?
Most people who teach or talk about the markets and how they perform always share their numbers in how much money they made. This practice can be a bit deceiving for those who are just starting out. You will always see these videos with people claiming they made $6,345 in 30 minutes trading the stock market. Those are just buzz words to get you hooked to whatever product they are trying to sell.
This will give you the unrealistic expectations that you as well need to be able to make that much money. With that mindset, you pretty much set yourself up for failure, or on a path of a lot of pain in trying to become your own master of the markets.
What I’m about to explain is to help debunk this approach. The R system is designed to help remove the notion of dollar value on your trades, create a more fact-based approach on improving your performance, managing your risk, and scaling your growth as a trader.
What is the R system?
The R system is a method and approach used by most seasoned traders. These traders already know how much they are willing to risk on each trade, and they use this value for every trade. Everyone’s risk is different. Perhaps you are just starting and you only want to risk $50 on each trade. More seasoned traders might risk $1000 on each trade.
It doesn’t matter how much you are willing to risk. What you do is write down that dollar amount and for now on, call it 1R. So for each trade you take, you are willing to risk no more than 1R. If you do, then you are breaking one of your trading rules.
How to calculate your R when taking a trade
Say your R is $100.
AAPL is trading at $303. You want to take it bullish and you know your stop loss is $302.45. Now you need to calculate how much stock of AAPL you are allowed to buy so you do not lose more than $100 on this trade
So we take our 1R value then divide it the difference of your entry minus your stop:
$100 / (304 – 303.45)
$100 / (0.55) = 181 share (always round down do we don’t go above our R!)
So if you buy 181 shares of AAPL at $304 and your stop loss is at $303.45, there is NO WAY you can lose more than 1R on your trade!
If you want to take a bearish trade, the formula is slightly different (let’s use the same numbers as above but as a short instead)
1R divide by the stop loss value minus the entry
$100 / (303.45 – 304)
Click Here for your free tool to help you calculate your R, and also journal all of your Trades!
The Benefits of using the R system
Now that you understand how the R system works, let’s take a look at some of the advantages of using it
- You will never risk more than your R. This one is obvious but you’d be surprised how many people don’t risk the same amount on each trade. Most traders will always buy a fixed amount (say 100 shares). This can have a huge fluctuation in your P/L if you are trading a $10 stock, vs a $300 stock. If you win 10/10 trades on $10 stocks but then lose one trade on a $300 stock, it’s very possible that 1 loss will lose all your gains because you are buying the same amount of shares but the actual value loss is much more on the $300 stock.
- Removes the monetary value in your head. Trading is an emotional battle and money can bring a lot of emotions to the table. Using the R system can change that mindset. Instead of saying “Oh I need to make $500 today”, you can say “my goal is 5R this week”. When you start thinking in R’s, the dollar amounts will stop messing in your head and you will most likely start trading better
- It’s easier to scale your account. If you are starting off, start with a $50 R. Then say you make 10R for 2 months. Bump your R to $75, and so forth. Again not setting monetary values as targets but using R and growing your account will help make your trading consistent, and that’s the key to becoming a successful trader.
- It’s a better way to gauge the performance among other traders. Let’s be honest, if a guy is boasting he’s making $8000 a month (and he’s really is a good trader), it can be a bit discouraging when you see you only made $700 this month. But say his R was $1000 and your R was $50. He’s up 8R this month and you are up 14R. You actually traded better than him! So if you are part of a trading community, using this system can certainly help.
Try using this system for a month and see if you get any meaningful benefits to your trading. I’m pretty sure you will!