1
Initial risk
The planned loss from entry to the original stop, including position size.
Lesson · Trading Risk Management
Reward-to-Risk and R-Multiples
Express trade outcomes in units of initial risk, compare targets consistently, and avoid confusing a large target with a high-quality setup.
Core concepts
What to understand
Keep the process direct: define the risk, calculate it, and enforce the limit.
2
R-multiple
Realized or unrealized profit and loss divided by initial risk.
3
Target feasibility
Reward-to-risk is meaningful only when the target aligns with market structure and liquidity.
Interactive lab
Change the risk conditions
Adjust the controls and read the market behavior and account impact after each change.
Reward-to-Risk and R-Multiples Lab
Synthetic educational data · no live market connection
RISK MODEL
Risk process
Apply it in order
Risk calculations should happen before the order is submitted.
Mark entry and stop
This distance defines 1R.
Locate the structural target
Use prior highs, lows, range boundaries, or tested value areas.
Compare without forcing
Reject trades whose realistic target does not provide acceptable reward relative to risk.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. A trade risks $200 and gains $400. What is the outcome?
$400 divided by $200 initial risk equals +2R.
2. Does a 5R target make a setup automatically better?
A distant target has no value if structure makes it unlikely or the stop is artificially tight.
3. Which risk defines R after the stop is moved?
Performance is normally measured against the original initial risk for consistency.
4. Initial risk $300. Half the position exits at +2R and the other half is stopped at −1R. Realized result?
Each half carries half the initial risk. 0.5 × (+2R) + 0.5 × (−1R) = +0.5R, or +$150 on the $300 risked. Partial exits are averaged by size, not added.
Practical rules
- Define 1R from the original entry and stop.
- Use structural targets before calculating reward-to-risk.
- Record realized outcomes in R for cross-trade comparison.
Common mistakes
- Moving the stop closer only to improve the ratio.
- Calling an unrealized maximum excursion the realized result.
- Ignoring partial exits when calculating R.
References
Official reading
The labs use simplified synthetic examples. These sources cover the underlying risk and execution concepts.
CME Group · Trading Strategies in Your Trade Plan
Define stop-loss and profit targets before entry.