Thinking in R(s) may be what you need to improve your trading

BellaBella Daily Update

One day each month, we block off time for each trader to present their monthly review.  Today is that day.

Themes often develop during these reviews as to what is working for many traders on the desk.  Today a theme emerged for many of the developing traders.  And that theme can help your trading.

Junior traders or developing traders often find edge and then next focus on sizing.  There are terrific techniques to work on sizing.  One of my favorites is The Monster Trade Review.  The Monster Trade Review was presented by a future star trader.  This theme that emerged can also help with your sizing.

One of the things that is so exciting about taking the day to do these reviews is to see the undeniable talent on the desk.  There has never been a collection of talent at one time in our firm’s history.  We have had more traders in the past.  We have had more profitable traders at one time.  But we have never had the collection of stars and futures stars contemporaneously.  Now it is our job to make sure they develop.  We have done that very well over the years, so….. we like our odds.

But more than that it is just flat out fun to work with future stars.  Some don’t know where they are headed yet.  But we have developed enough great traders over the years that it is clear to us.

So what is this theme of the month that has been helping our traders and can help YOUR trading?

Many of the developing traders on the desk talked about thinking in R(s) and not PnL.  Thinking in R(s) was helping them to trade better and bigger.

What is R?

R stands for the amount of risk you take in a trade.  Let’s say you buy 1000 shares of XYZ stock at $50.  And your stop is 49.  Then your R is $1000.

If you measure your results in Rs, then you calculate your profit in the trade to your risk.  So if in the trade above you bought ZYZ stock at 50, placed a stop at 49, and sold it at 52, you made 2R.  You made 2xs your risk in the trade.

And you can measure your trading day like this as well.  I will risk R for the intraday.  Today, I made 3R.

And you can measure your trading month like this as well.  I risked R for the month.  And this month, I made 20R.

Notice there is no mention of money.  And we can increase R as we are having success.  Perhaps R moves from $1,000 to $1,500.  You still continue to measure in R.  It is just that R is now 50 percent bigger.  And after periods of success you continue to systematically and responsibly increase R.

What traders from the desk communicated they found most helpful about thinking in R(s) is it is easier to scale, to size up, by approaching markets in this way.  Some get caught up in the dollars when they focus on PnL.  If I take a trade I may lose $1000, which becomes difficult for some new and developing traders to handle.  It is easier to accept: I will risk 1R.  Also, when a trade goes in their favor it may be difficult for them to hold a winner if they have an open profit of $1500.  They see that open profit of $1500 as money they could lose as opposed to focusing on how best to handle the trade.  But if the trade calls for an exit of 3R, then they focus on that and not the money.

I asked the trading community in a tweet:


You may enjoy the feedback from the trading community here.  There are many excellent ideas shared.

This is what some of our guys are working on on the desk.  I hope this provides you with some ideas to improve your trading.

*no relevant positions

Mike Bellafiore is the Co-Founder of SMB Capital, a proprietary trading desk, and SMB Training, which provides trading education in stocks, options, and futures. Bella is the author of One Good Trade and The PlayBook. He welcomes your trading questions at [email protected].