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Defining 1R

Lesson 9 · about 7 min

Dollars are a bad unit for judging trades. A $300 loss is a rounding error on a $200,000 account and a catastrophe on a $2,000 one. A $300 win on a trade that risked $50 is excellent; the same $300 on a trade that risked $1,000 is a badly managed position. To compare trades honestly you need a unit that already has the risk built in. That unit is R.

1R is your planned loss

1R = the dollars you will lose if the stop is hit, as planned, before the trade is entered.

If your account is $10,000 and you risk 1%, then 1R = $100 on every trade this month. On a $50,000 account at 0.5%, 1R = $250. Whatever the number, you set it before entry and every outcome is measured against it.

Outcome Dollars In R (1R = $100)
Stop hit exactly −$100 −1.0R
Stop hit with $30 slippage −$130 −1.3R
Exited early at a small loss −$40 −0.4R
Scratched near breakeven +$10 +0.1R
Target hit +$250 +2.5R
Runner, trailed far +$470 +4.7R

The −1.3R row matters. Slippage, gaps and fees are real losses and you record them at their real size. A trade log full of exactly −1.0R losses is a log that is lying to you.

Key idea: R is risk-adjusted profit. Measuring in R lets you compare a forex trade with a futures trade, a $2,000 account with a $200,000 one, and last year's results with this year's.

Reward-to-risk before the trade

Before entry you also know where the target is. The distance to the target divided by the distance to the stop is the trade's planned reward-to-risk, also stated in R.

Long trade: entry $50.00, stop $48.00, target $56.00.

  1. Stop distance = 50.00 − 48.00 = $2.00. That is 1R per share.
  2. Target distance = 56.00 − 50.00 = $6.00.
  3. Planned reward = 6.00 ÷ 2.00 = 3R.

Short trade: entry $18.60, stop $19.35, target $16.35.

  1. Stop distance = 19.35 − 18.60 = $0.75.
  2. Target distance = 18.60 − 16.35 = $2.25.
  3. Planned reward = 2.25 ÷ 0.75 = 3R.

Both trades are "3R setups", even though one is on a $50 stock and the other on an $18 stock, and even though the dollar sizes will differ. That is the point of the unit.

Planned R versus realised R

The 3R in the example is what you planned. What you actually get is realised R, and it is almost always different:

  • The target is hit but you took half off at 1.5R and the rest at 3R: realised (1.5 + 3) ÷ 2 = 2.25R.
  • Price goes to 2.4R, reverses, and you exit at 0.8R: realised 0.8R.
  • Stop hit in a fast market at $47.70: realised −1.15R.

Keep both numbers. Planned R tells you what kind of trades you are choosing. Realised R tells you how well you are executing them. The gap between the two is where most of your improvement lives.

Why the stop must be decided first

R only works if 1R is fixed before entry. Traders who "give it a bit more room" after entry have changed 1R mid-trade; the −1R loss they record was really −1.6R. Over a hundred trades this quietly turns a +0.3R expectancy (next lessons) into a losing system, and the log will not show it.

The rule: the stop you enter with defines 1R. You may move it closer (reducing risk) or, in a winning trade, trail it behind price. You may never move it further away. If the market proves the original stop was wrong, exit, re-evaluate and re-enter as a new trade with a new 1R.

R and position size are the same decision

Notice that everything from Module 2 is just R in disguise. Dollars at risk is 1R. Shares = 1R ÷ stop distance. So when you sized the trade correctly, you already defined 1R, and the log only needs to record the result as a multiple of it.

Try it: Take your last ten trades (real or paper). For each, write the dollars you planned to lose at the stop, then the actual result in dollars, then divide to get realised R. If you cannot find the planned loss for a trade, that trade had no 1R, which means it had no size discipline either.

Recap

  • 1R is the dollars you plan to lose at the stop, fixed before entry.
  • Every outcome is recorded as a multiple of 1R, including slippage and fees at their real size.
  • Planned reward-to-risk = target distance ÷ stop distance, in R.
  • Track planned R and realised R separately; the difference is your execution.
  • The stop may move closer or trail, never further away; moving it away silently changes 1R.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Risk and reward on one tradeA price scale showing an entry with a stop two points below and a target six points above, so the reward band is three times the risk band.PRICETARGET 106.00ENTRY 100.00STOP 98.00REWARDRISK6.00 pointsthree times the risk2.00 pointsthe most you loserisk : reward = 1 : 3
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.