The concept of an R-Multiple™ was pioneered in 1993 by trader Chuck Branscomb, who explains that this technique is "The most important way to look at systems." The idea came about as a way to equate all markets and get away from looking at expectation in currency terms." R-Multiple™s were popularized by Dr. Van Tharp in his book, "Trade Your Way to Financial Freedom".

An R-Multiple™ is simply the profit or loss for a given trade divided by the entry risk. The entry risk is defined as the difference between the entry price and the stop price at the time of the entry.

The R-Multiple™ Distribution graph accounts for every closed trade in the simulation, both winning (green) and losing (red) trades. For the test reflected in the graph above, there were a total of 807 trades. Of 292 winning trades, 105 fell in the range between 0R < 1R. Continuing to the right, 47 winning trades had R-Multiple™s between 1R < 2R, and 38 trades fell in the bin of trades in the range 2R < 3R, etc. Note that 14 winning trades had R-Multiple™s of 15R or greater.

The histogram of Losing Trades (above, left) shows that the vast majority of losers were of a magnitude of -1.5R or less, with 393 trades (out of a total of 515 losing trades) less than -1.5R.

The thin lines above the bars of the histogram are cumulative plots. Note that two scales apply to the vertical axes: on the outside is the Number of Trades, and on the inside is the Cumulative Percentage. For Winning Trades, the starting point of the cumulative plot (<1R on the horizontal axis) contains 105 trades. But the next data point (the 1R < 2R bin on the horizontal axis) grows to 152 trades (105+47) on the right vertical axis, and encompasses slightly more than 50% of all winning trades, according to the left vertical axis.

As can be clearly seen, the Losing Trades were relatively well contained: The cumulative plot line shows at a glance that roughly 90% of losers were of a magnitude of -1.5R or less.

Edit Time: 6/25/2017 9:43:30 AM |
Topic ID#: 4006 |