Discussion in 'Risk Management' started by .sigma, Jan 19, 2020.

  1. .sigma


    Does anyone manage their risk using the R-Multiple approach that Dr. Van Tharp introduced in his books?

    To me its a very concise way to trade, and disciplines the trader in always having a pre-determined stop for each and every trade, thus establishing your 1R.

    I just don't understand how to apply R-Multiple with options. Do you calculate your risk (1R) using the stock price as your stop? Or do you use the options premium price? Or what? Anyone have any input to this method?
  2. smallfil


    Risk in simplest form is the difference between your entry and the stop loss. To be profitable, your gains must be say, several multiples of your risk. If your risk is $2 then, you want atleast $8-$10 in gains. Then, you can be wrong multiple times and probably, still make monies. Of course, that is assuming your trading system has an edge. Stock options is a different animal since, you cannot set hard stops as the market makers will take you to the cleaners. You need a mental stop for stock options to minimize losses. Your maximum loss is the cost of the premiums if you lose all of it 100%. Nothing stopping you from exiting a trade that does not work. The goal is still the same, try to save your capital and your options profits should still be multiples of your option premium to make it worth your while.
    .sigma likes this.
  3. .sigma


    This is, in essence how Tharp presents R-Multiple.

    The thing that intrigued me about this was how you HAVE to calculate your stop loss FIRST, this keeps one disciplined in the management practice.

    Expectancy is a big part of the system.

    (prob of winning x avg win) - (prob of losing x avg loss).

    The idea of comparing your INITIAL risk to your R-Multiple profit makes a lot of sense. This is why position sizing is one of the most important aspects (especially for traders who suck directionally), in that your system can LOSE money more than 50% of the time and you can still profit somewhat. But that's not the point of R-Multiple. The point is to become a disciplined trader and record your R's and position the next trade correctly, remember kids size kills.
  4. smallfil


    Risk management is job one for traders aspiring to be successful in the stockmarket. It does not matter if you have $1,000 or $1,000,000. Without risk management, you will blow it all up. Position sizing controls your risk per trade and caps your losses.