You will see references to “R” when engaging with Edge Navigator. Here’s what that means and why many professional traders size positions using R instead of shares, dollars, or percent.
R is a unit of risk. It represents the total amount of money you are willing to lose if your trade idea is wrong.
Note: We cover “shares” below, but the same concept works for contracts in futures and options, as well as crypto currency.
Before you think about shares, you decide one number: how much am I willing to lose on this trade?
That number is 1R.
Once that number is set, everything else becomes simple math.
Shares = R ÷ (entry price − stop price)
If you are willing to risk $500 and your stop is $2 below your entry, you buy 250 shares. Not because 250 feels right. Because $500 ÷ $2 = 250.
You are not picking shares first and discovering risk afterward. You are deciding risk first and backing into shares.
From that point forward, performance has a common language.
If the stop is hit, you lose -1R.
If you make what you were willing to risk, you make +1R.
If you make twice that amount, you make +2R.
R becomes the ruler.
Why Not Just Use a Fixed Share Size?
Because markets don’t stay fixed.
Five hundred shares of a $20 stock is one thing. Five hundred shares of a $100 stock is something completely different. The share count stays the same. The risk does not.
Fixed shares ignore:
• Share price
• Changing volatility
• Stop placement
Why Not Just Allocate a Fixed Dollar Amount?
Putting $10,000 into every trade adapts to share price, but not to the stop. If one trade has a $0.50 stop and another has a $6 stop, the risk profile is completely different even though the dollar allocation is identical.
Percent of account behaves the same way. It adjusts as your account changes, but it still ignores how far away the stop is.
R solves this by anchoring everything to one decision: how much am I willing to lose if I’m wrong?
Now let’s look at how this works in practice.
Example 1 – Precise Level
Imagine a stock trading at $50. There is a clear level on the chart. If it breaks below $49.20, the idea is wrong.
The distance between entry and stop is $0.80.
If your R is $400, the math tells you to buy 500 shares. $400 divided by $0.80 equals 500.
If the stock moves to $52, you make $1,000. That’s +2.5R.
Notice what happened. The stop was tight because the level was precise. The share size was larger because the stop was tight. The total risk stayed at $400.
The structure determined the stop. R determined the size.
Example 2 – Broader Momentum
Now imagine a different setup. The stock is at $100. It’s trending, but it needs room. The stop is placed at $94 to avoid normal pullbacks.
The distance to the stop is $6.
Same trader. Same R. $400.
This time, $400 divided by $6 equals about 67 shares.
If the stock moves to $112, the profit is about $804. That’s roughly +2R.
The stop is wider because the setup needs room. The share size shrinks because the stop is wider. Risk stays the same.
Most traders do the opposite. They keep the same share size and let the risk expand and contract without realizing it.
Example 3 – Different Time Frames
Now compare a 5-minute trade and a daily swing.
On the 5-minute setup, maybe the stop is only $0.40 away. On the daily chart, maybe it needs $5 of space.
If your R is $500, that’s the only number that matters.
The 5-minute trade will allow a much larger share size. The daily trade will allow fewer shares.
Different time frame. Different volatility. Same total risk.
That’s the discipline. The chart changes. Your risk does not.
Pro Insight: Day trading is not just a faster form of trading, there are additional risks to consider. For example, one penny of slippage on an intraday trade with a $0.40 stop is 2.5% of slippage against your PNL. That same penny of slippage on a Daily chart with a $5 stop loss is just 0.2% of your PNL.
R also makes performance easier to understand.
As strange as it may seem, consistently profitable traders don’t obsess over win rate. Instead, they focus on expectancy — how much they make, on average, over a series of trades.
Expectancy is simply the average R you earn over time.
Imagine a strategy that wins 4 out of 10 trades. Many novice traders aim to oavoid such as scenario. But, what if the average winner is +2.2R. The average loser is -1R.
Over a large sample, that works out to about +0.28R per trade.
That number may not sound dramatic. It doesn’t need to be.
If your R is $500, that edge is worth about $140 per trade on average. Six losses of $500 each ($3,000 total in losses), and four winners of $1,100 each ($4,400 total in wins). Ending with $1,400 in growth. Not bad for being wrong “most of the time”.
If your R is $1,500, that save average trade is worth about $420.
The structure didn’t change. The math didn’t change. Only the scale changed.
In Edge Navigator Research, we focus on trades that begin with a clearly defined stop Some times we exit for a different reason, but this defined stop gives defines R. Share size (or contracts) is calculated from that number. Performance is measured in R so results can be compared across symbols, time frames, and market conditions.
Bottom line: Risk is decided first. Size comes second.
— Andrew Falde
Founder, Edge Navigator