1. Thinking In Terms Of R
2. Excel
3. Losing My Ass
Hello all and happy new year! I commented on a post the other day and was explaining what “R” is and realized there were a few key lessons in my trading career which have really improved my performance. I’ve been trading for 7 years and have been full-time trading for the last 3. All three of these lessons helped me get to where I am today.
The first, thinking in terms of R!
What is R? R is a way to normalize risk as a trader and methodically manage your risk and capital as a retail trader. One of the most common emotional pitfalls that traders tend to fall into their first few years is PnL attachment. You may see a daily gain equal to your weekly paycheck and get incredibly emotional as well as attached to the trade. Or vice verse you may see a huge daily loss and your mind wanders to how many days of work it took you to get that amount of capital. If that’s the case, and I’ve been there before you can find yourself on tilt and placing stupid trades and losing your ass.
How thinking in terms of R helped me out was it normalized the risk on a day-to-day basis. For example, instead of coming into the market each morning and just betting on whatever I feel is right. I already have a pre-determined plan on how I should bet on this trade. R is simply a risk unit. On each trade I take I risk 1R’s worth of risk from my entry to where I believe my trade would be invalidated.
To further this concept, I preset my R each day to a predetermined amount that reflects a % of my equity. Personally, I am a bit risk-averse so I like to risk 0.5% to 1% of my account balance per individual trade. If you are trading with a profitable system and or setup then you should run into zero problems with this method in regards to blowing up.
Some other applications that R can better serve you are compounding your risk, managing your risk on a daily and per ticker basis as well as increasing your execution speed.
To compound your risk and grow your account as your account equity grows each day, week, and month you’re just adjusting your R on a daily basis to your predetermined set % of your account. Simple! This will also help greatly with managing emotions when you go from risking say $25 a trade to $1000 a trade. Simply because it’s just 1R.
Some ideas on how you may use it to manage risk better are obviously each trade will be capped at 1R. But maybe you can create a max strike per ticker rule, say 3 strikes and you’re out. So my new rule is, I will only risk 1R per trade and no more than 3R per ticker for the day. Lastly, why not a max daily loss on the day? Say you set your max daily loss for 10R on the day which you can also set at a broker level. Now not only are you protected per individual trade but also per ticker and on the day.
Lastly how R can help you is with execution speed! Depending on the trading platform you use there are options to build customizable hotkeys. You can code these hotkeys to enter vs. an anchored stop loss with your pre-determined R. For example say I am looking to buy the morning dip on an earnings winner stock that has gapped up. I can have a hotkey coded to get long said stock vs. LOD risking my inputed 1R worth of risk. So with the click of a button, this hotkey will auto-calculate the share size needed for the trade to risk 1R, execute a buy order to enter the trade, and set a stop loss as well to where it is told. All with one button click! In milliseconds!!
Excel
A second lesson I’ve learned which was I’d say the most pivotal in my entire 7 years was excel. At the time I belonged to a membership subscription and was chatting with one of the moderators. He was nice enough to hop on a zoom call with me and introduce the concept of backtesting.
Backtesting or my version of backtesting at least is gathering historical data based on criteria. Inputting that said data into excel (or google sheets). Building a systematic approach to entering, exiting, and managing trades all based on statistical data.
For a while, I found the concept quite daunting but it really isn’t anything complex such as full-blown algorithmic trading. The main goal of this is to identify edges and consistently execute the same way each trade. Basic statistics such as win rate, avg. drawdown, avg winner, and avg loser can be found through backtesting, and knowing these stats and how to execute to achieve them can be pivotal to your trading profitability!
Losing My Ass
Lastly, the third lesson I learned but not in any particular order was losing my ass hahahaha. I’ve lost my ass countless times throughout the last 7 years. On some occasions, rookie mistakes earlier on, and some stupid yolo trades as well earlier on. Later, justified trades but placed with too much conviction.
There’s truly no better teacher than experience and as much as it hurts me to say this I’ve never met a trader who’s reached profitability without first losing his ass and experiencing frustration before.
Every time I’ve drawdown deep or when first starting blown up an account I’ve been able to take away lessons from the market that were the result in hitting new levels of profitability in my trading.
There will be hundreds and thousands of small and some large lessons to learn that will help you grow and learn as a trader. I figured I’d share the three that stick out to me the most.
Happy trading and cheers to a good 2023! If you feel like having a conversation about any of this further feel free to reach out!
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