“I made 700 pips on Eurusd!”
“We had 50% return in 2 weeks!”
“Double your trading account in 3 months!”
Does that sound all too familiar?
Newbies are often in awe and envy when they hear traders sharing how many pips they made or what a huge percentage return they had.
However mentioning trading performance in terms of pips or percentages are meaningless because it does not take into account the initial risk of the trade.
Making claims like these are misleading as they are a relative measure.
Imagine there are 2 traders. One risking 500 pips and made 1000 pips and another risking 10 pips and made 1000 pips. Which trader has a better performance? The one risking 10 pips of course! Knowing this is only possible if we know their initial risk per trade.
Trading performance in terms of R
Thus a more objective approach would be measuring trading performance in terms of R.
I define R as your initial risk on each trade. (If you made 3R, it means you made 3 times your initial risk.)
If you long Eurusd at 1.3000 with Stoploss at 1.2950, then your initial risk is 50 pips. Thus every 50 pips price trades higher is 1R. If you then sold Eurusd at 1.3100, you made 100 pips. Thus a profit of 2R. (100/50=2)
Similarly, if you short Eurusd at 1.3000 with Stoploss at 1.3100, then your initial risk is 100 pips. Thus every 100 pips price trades lower is 1R. If you cover back your trade at 1.2500, you made 500 pips. Thus a profit of 5R. (500/100=5)
In future when you come across traders sharing their trading performance, you know what is an objective measure to take note. Not pips or percentages, but R.
I hope the R metric will be an objective tool in evaluating your trading performance, and allow you to differentiate the quality of traders around you.
So, will you still be green with envy when you hear a trader racking in 1000 pips?