So far all we've talked about on this blog is returns. Profits and losses. It's time to change up the format a little bit and add risk to the mix.
I like to use Van Tharp's Reward-to-Risk Ratio (R) to measure the risk on any given trade. It allows me to quantify my risk immediately whenever I enter a trade and set my stop, and an added benefit of using R is that it also generates an expectancy we can use for future trades. As you'll see below, based on the history of trades we've already made, our reward/profit expectation on future trades would be 4.86 times the initial risk taken on the position.
1. LONG signal the week of 5.5.03 at $9.15. With a $7.03 stop the initial risk (R) on the trade was $2.37. Stopped out and reversed to short at $63.19 the week of 3.6.06. The percentage gain on the trade was 590.6%, and the reward-to-risk ratio was $54.04/$2.37 = 22.78.
2. SHORT the week of 3.6.06 at $63.19. With the stop at $81.60 the R was $16.94. Stopped out and reversed to long at $68.30 the week of 7.31.06. The percentage loss on the trade was -8.1%, and the reward-to-risk ratio was -$5.11/$16.94 = -0.30.
I like to use Van Tharp's Reward-to-Risk Ratio (R) to measure the risk on any given trade. It allows me to quantify my risk immediately whenever I enter a trade and set my stop, and an added benefit of using R is that it also generates an expectancy we can use for future trades. As you'll see below, based on the history of trades we've already made, our reward/profit expectation on future trades would be 4.86 times the initial risk taken on the position.
1. LONG signal the week of 5.5.03 at $9.15. With a $7.03 stop the initial risk (R) on the trade was $2.37. Stopped out and reversed to short at $63.19 the week of 3.6.06. The percentage gain on the trade was 590.6%, and the reward-to-risk ratio was $54.04/$2.37 = 22.78.
2. SHORT the week of 3.6.06 at $63.19. With the stop at $81.60 the R was $16.94. Stopped out and reversed to long at $68.30 the week of 7.31.06. The percentage loss on the trade was -8.1%, and the reward-to-risk ratio was -$5.11/$16.94 = -0.30.
3. LONG the week of 7.31.06 at $68.30. The stop was $51.80, so R = $11.85. Stopped out and reversed to short at $130.01 the week of 1.22.08. The percentage gain on the trade was 90.4%, and the reward-to-risk ratio was $61.71/$11.85 = 5.21.
4. SHORT the week of 1.22.08 at $130.01. With the stop set at $187.58 the R was $53.83. Stopped out and reversed to long at $161.04 the week of 4.14.08. The percentage loss on the trade was -23.9%, and the reward-to-risk ratio was -$31.03/$53.83 = -0.58.
5. LONG the week of 4.14.08 at $161.04. The stop was $118.71, so R = $51.02. Stopped out and reversed to short at $148.94 the week of 9.8.08. The percentage loss on the trade was -7.5%, and the reward-to-risk ratio was -$12.10/$51.02 = -0.24.
6. SHORT the week of 9.8.08 at $148.94. With a $188.95 stop the R on the trade was $48.04. Stopped out and reversed to long at $115.99 the week of 3.30.09. The percentage gain on the trade was 22.1%, and the reward-to-risk ratio was $32.95/$48.04 = 0.69.
7. LONG the week of 3.30.09 at $115.99. The stop was $84.39, so R = $35.18. Closed at $344.56 last week, and we have not been stopped out. The percentage gain on this trade is 197.1%, and the reward-to-risk ratio is $228.57/$35.18 = 6.50.
Scorecard:
Winning Trades: 4 | 57.1% | $94.32/share avg.
Losing Trades: 3 | 42.9% | -$16.08/share avg.
Average Trade: Gain of 123.0% | $47.00/share
Average Reward-to-Risk Ratio (R): 4.86
Average Reward-to-Risk Ratio (R): 4.86
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