Updated: Mar 18, 2020
You may have seen tweets with people referring to "R"
Here's an example from Twitter, a little while ago. Removed their names for privacy reasons. But you might be able to guess who the Tweeter was...
So, what exactly s this R?
R can essentially be substituted for "Risk" and it measures the distance between your entry and your Stop Loss.
Here's an example of a Gold short, where the Stop Loss would be Monthly Resistance 1, and if you look down you see equal measurements, expressed by Multiples of that distance from your Stop Loss (see 1R, 2R, 3R etc)
A video how to set up the Metatrader Fibo tool to define these risk multiples as follows:
You don't have to use increments of 0.25 but as long as your number regularly adds up over the same intervals, that's fine. So 0.10, 0.20, 0.30.
So, let's say this was a successful trade and we hit 4R at $1356, we then have to apply a little mathematics to derive the R value.
It's not so bad, it's quite easy.
1. First of all, we need to determine the distance from our entry to our Stop Loss.
The entry was at $1434 and our Stop Loss at $1454, that distance is $20
Therefore 1R = $20 ($20 is the amount you were prepared to risk - hence "1R")
2. Next step is to determine the distance from our entry to Take Profit.
We know the entry was $1434 and we hit Target at $1356
So therefore the distance between entry and target is $78
3. Now, all you have to do is divide the two together:
Distance from entry to target / Distance from entry to stop = +3.9R
If you're very clever about trading and you trade WELL, and respect the R, you'll always succeed in the long term
As a sidenote this Gold wasn't a brilliant example, since a $20 Stop Loss is rather huge, and not recommended but did serve as a good example.
Hope this helped!