Forex Target Signals And R-Multiples
When running a Forex signals service, the signals provider is faced with how they are going to track performance. After all, the signals performance is what most people want to see when deciding to join or not. But it is very hard to decide on one measure of performance that puts the trading in proper perspective for every trader.
- All traders do not start using the signals at the same time
- All traders do not have the same starting balance in their account
- All traders do not use the same amount of risk for each of the trades
- All traders, even though warned against it, do not trade the signals in the same way
The point is, presenting performance in terms of dollar amounts, percentages and even pips has its drawbacks.
Dollar Amounts: If I state I made $10,000 on a trade, that might be true. But that is not going to be true for someone trading a smaller account with different money management. So, in my opinion, dollar amounts are not a fair performance tracker.
Percentages: If I state I made X% on a trade, that does not mean a signal follower made the same amount of percentage gain. This would only be true if they were using the exact same money management strategy. They might have made half that percentage, or double. So again, percentage gains are specific to the money management being used, and not a universal performance measurement.
Pips: For the reasons stated above I use PIPS as the measurement of performance for Forex End Of Day Signals and Set & Forget Forex Signals. However, even measuring in pips has it drawbacks in terms of putting the trading in perspective for each signals user. Basically, what these pip numbers “mean” in terms of money for each individual trader is different and and determined by the size of the account being traded and the money management strategy being used.
Therefore, when adding Forex Target Signals to the Forex Investing Live Signals portfolio, I decided to do something different when it comes to measuring performance. I am going to measure performance using R-Multiples.
What Are R-Multiples?
Measuring trading performance by R-Multiples is not something I created. The credit goes to Dr. Van Tharp, a world leader on position sizing and trading psychology.
“R”, simply is a way at looking at the risk to reward ratio. When we place a trade, we also place a stop loss. Regardless of whether you look at this stop loss value in terms of money, percentage of your account or pips, this is the amount you are risking when you place the trade. Therefore, the amount you are risking is the value of R, or 1R.
Now you have something to measure the reward of the trade against.
Essentially we are going to be tracking performance in terms of the amount risked versus the amount gained/lost.
This in itself is an excellent way to look at and measuring trading performance. It can even be key in finding a successful trading strategy. In the book, “Financial Freedom Through Electronic Day Trading”, Dr. Van Tharp describes the secret of successful trading:
The golden rule of trading is to keep losses at a level of 1 R as often as possible
and to make profits that are high-R multiples.
In other words, make more money on winning trades than you lose on losing trades.
Why Is Using R-Multiples Perfect For
Tracking Forex Target Signals Performance?
In order to be profitable as a Forex trader, all you need to do is make more money on winning trades than you lose on losing trades. To do this, you need to trade in a way where you have a positive risk to reward ratio.
Forex Target Signals focuses on risk to reward. Only trades with a positive starting risk to reward are taken. In terms of R-Multiples, we are risking 1R for the opportunity of make MORE THAN +1R on every trade. This could be +1.5R, +2R, +2.6R, etc.
When we have a losing trade, that will be -1R. When we win a trade, that will be MORE THAN 1R. The goal is to trade Forex Target Signals and end up with a POSITIVE R-Multiple at the end of the year… the higher the better.
For example, if we took trades with 1R risk and +2R reward, we would be doubling our money on each winning trade compared to a losing trade. Therefore, if we placed 10 trades and 5 were losers and 5 were winners, it would look like this…
5 losing trades = -5R
5 winning trades = +10R
Overall Performance = +5R
As you can see, the goal in this example is to make twice as much on winning trades as we lose on losing trades. Doing this, we can be profitable with only a 50% win rate. If we win the same amount of trades as we lose with this 1:2 risk to reward ratio… we will be profitable.
SIDEBAR: Trading is not as clean as this in the real world. Trading gets messy. There will be trades where we make 1.2R. There will be trades where we make 4R. There will be trades where we move the Stop Loss to Breakeven +10 Pips, and the stop gets hit. There will also be trades where we manually close the trade for some reason with only 0.5R as reward.
So, there will be a wide range of R-Multiples on our winning trades. But as long as we strive to make R-Multiples greater than our 1R risk… we should be profitable over the long term.
In conclusion, we are not going to be tracking the performance of Forex Target Signals in terms of dollar amounts, percentages or even pips. We are going to be using R-Multiples. We are going to be comparing the amount risked versus the amount gained. A full loss will be -1R and a win will range anywhere from 0.1R to high R-Multiples.
The goal is to end the year with each currency pair traded ending with POSITIVE R-Multiples… the higher the better. We feel this is a better way to track our performance and express the strength of our trading strategy. At any rate, this is a way of tracking performance that should be explored.