Risk-Unit Multiples

...cont'd from yesterday...

What is the Reward to Risk Ratio of your method of trading?

The Reward portion of the Reward/Risk Ratio is straightforward. It’s the profit you make per trade.

What about the Risk portion? How do you calculate that? One way is to express it in terms of how much money you would lose if your Initial Stop Loss price is hit. With that concept, you can calculate the Reward-Risk Ratio without regard to how much capital you are using. That’s helpful because it allows you to compare trading methods across different capital amounts.

This idea leads to the measurement called Risk-Unit Multiples, sometimes called “R Multiples”.

Risk-Unit Multiple
=(Actual Profit or Loss on a trade) / (Dollars per share you lose if your stop loss is hit in that trade)

You can use that formula to calculate the Total Risk-Unit Multiples for each hour of the day. That will reveal what time of day, if any, that your method works and how well it works in that hour. You can use this information to decide what your trading hours will be when trading intraday.

...cont'd tomorrow...

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