Risk & Performance Analysis: statistics, drawdowns and journaling

01

R-multiples, expectancy and costs

In simple words

Imagine you shoot baskets and keep score in "attempts", not dollars. Some shots score a lot, most score nothing. To know if your game is any good, you count what you risk on each shot, add up all shots, and subtract the cost of renting the gym. Many players forget the gym fee.

Key facts

Education only. The numbers here are invented to show the math. They are not results of any real method.
An R-multiple measures a trade in units of the amount you risked. If you risked $100 (1R), a $200 result is +2R and a full stop-out is -1R. This lets you compare trades of different sizes. (Risk per trade: course 5.5 and 5.12.)
Expectancy is the average result per trade, in R: Expectancy = (win rate x average win) - (loss rate x average loss). Example: win 40% of the time, average win 2R, average loss 1R. Expectancy = 0.4 x 2 - 0.6 x 1 = +0.2R per trade before costs.
Costs are measured in R too. If fees, spread and slippage cost 0.25R per trade, the same example becomes 0.2 - 0.25 = -0.05R per trade. It turns from a winner to a loser on paper.
Profit factor = total gross profit / total gross loss (before or after costs, say which). Above 1 means the winners were bigger than the losers in that list. It says nothing about the future.
A list is only a description of the past. An expectancy computed from 20 trades is an estimate with a large error (Lesson 2).
Failure modes:
Ignoring costs, or using the "ideal" price instead of the real fill.
Using average win and average loss from a few trades.
Removing "outliers" (one big winner) that actually made the whole result. If you remove the best trade, check what is left.
Mixing styles and markets in one list, so the numbers describe nothing in particular.

Example (made-up data)

Twenty pretend trades, results in R: +2, -1, -1, +3, -1, -1, +2, -1, -1, -1, +4, -1, -1, +2, -1, -1, -1, +3, -1, -1. Wins: 6 (30%), total +16R. Losses: 14, total -14R. Net +2R, so expectancy = +0.1R per trade. Profit factor = 16 / 14 = about 1.14. If costs were 0.15R per trade (3R over 20 trades), the net becomes -1R, and expectancy becomes -0.05R. Without the +4R trade, the net would be -2R before costs.

Step by step

Open a spreadsheet and paste the 20 made-up results above in one column.
Count the wins and losses (use COUNTIF; names can differ by app) and write the win rate.
Add the wins and the losses separately, and divide to get the profit factor.
Divide the net result by 20 to get the expectancy in R.
Subtract a made-up cost of 0.15R from every trade and recompute everything.
Delete the best trade and recompute once more.
Check: you should get +2R, 30%, profit factor about 1.14, expectancy +0.1R, after costs -1R, and -2R without the +4R trade. Write one sentence on why a result that depends on one trade is fragile.

Watch on YouTube

Your trade plan objectiveCME Group · YouTube · youtube.com

Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.

LESSON 01R-multiples, expectancy and costs

LESSON 01 / ANIMATED LESSON / AI VOICE00:00 / 01:00

Voice

Read the video script

[Host] "Count your trades in units of risk, not in dollars. That is an R-multiple."
[Text on screen: expectancy = win rate x average win - loss rate x average loss] "Expectancy is the average result per trade."
[Text on screen: 40% x 2R - 60% x 1R = +0.2R] "Win forty percent of the time, win two R, lose one R: plus point two R, on paper, before costs."
[Text on screen: costs 0.25R per trade: -0.05R] "Take off costs of a quarter R per trade, and the same list is a loser."
[Host] "A list of past results describes the past. It does not promise anything. Made-up numbers only."

Try it now

Make up a second list of 20 results in R (include at least one big loss). Compute win rate, profit factor and expectancy, then re-compute with a cost of 0.1R and without your best trade. Write two sentences on how fragile your list is.

ClaudeStuck? Copy a ready-made prompt for Claude

Copy this, open Claude, paste it, and Claude will walk you through the lesson step by step.

For a grown-up: Claude is for adults (18+). Copy this, paste it into Claude, and use the answer to explain the lesson to your child.

I'm learning "Risk & Performance Analysis: statistics, drawdowns and journaling" on The Future Market. Lesson 1: "R-multiples, expectancy and costs".

What the lesson teaches:
- Education only. The numbers here are invented to show the math. They are not results of any real method.
- An R-multiple measures a trade in units of the amount you risked. If you risked $100 (1R), a $200 result is +2R and a full stop-out is -1R. This lets you compare trades of different sizes. (Risk per trade: course 5.5 and 5.12.)
- Expectancy is the average result per trade, in R:
- Costs are measured in R too. If fees, spread and slippage cost 0.25R per trade, the same example becomes 0.2 - 0.25 = -0.05R per trade. It turns from a winner to a loser on paper.
- Profit factor = total gross profit / total gross loss (before or after costs, say which). Above 1 means the winners were bigger than the losers in that list. It says nothing about the future.
- A list is only a description of the past. An expectancy computed from 20 trades is an estimate with a large error (Lesson 2).
- Failure modes:

The exercise I'm working on:
Make up a second list of 20 results in R (include at least one big loss). Compute win rate, profit factor and expectancy, then re-compute with a cost of 0.1R and without your best trade. Write two sentences on how fragile your list is. ---

I'm stuck. Please:
1. Explain the main idea in plain, simple words with one everyday example.
2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step.
3. Don't just give me the final answer. Help me do it myself, and check my work when I share it.
4. This is for learning only. Remind me to check with a licensed professional before I make a real decision about my own money, health or legal situation.

I'm a parent helping my child (about 8 years old) with a lesson called "R-multiples, expectancy and costs" from the course "Risk & Performance Analysis: statistics, drawdowns and journaling".

Here's what the lesson says:
Imagine you shoot baskets and keep score in "attempts", not dollars. Some shots score a lot, most score nothing. To know if your game is any good, you count what you risk on each shot, add up all shots, and subtract the cost of renting the gym. Many players forget the gym fee.

The activity:
Make up a second list of 20 results in R (include at least one big loss). Compute win rate, profit factor and expectancy, then re-compute with a cost of 0.1R and without your best trade. Write two sentences on how fragile your list is. ---

Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words.
Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time.
Keep it general and educational. This is not advice for a real situation.

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My notes

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