Risk Management: R-Multiples, Drawdown & Survival
Think in R, manage drawdown, and understand expectancy — the numbers that separate a hobby from a business.
Thinking In R
R is your risk on a trade. Risk $100, and every outcome is measured against it: a 2R winner makes $200, a loss is -1R.
Thinking in R removes account-size emotion and makes any two strategies comparable.
Risk-to-Reward
If you risk 1R to make 2R, you can win only 40% of the time and still be profitable. Higher RR buys you tolerance for a lower win rate.
Expectancy
Expectancy = (Win% × Avg win) − (Loss% × Avg loss). Positive expectancy means the strategy makes money over many trades.
One good trade proves nothing. Expectancy only shows up across a large sample — which is why journaling matters.
Drawdown & Recovery Maths
Losses hurt more than gains help. A 50% drawdown needs a 100% gain to recover.
- 10% down → 11% to recover.
- 25% down → 33% to recover.
- 50% down → 100% to recover.
Non-Negotiable Rules
- Max risk per trade (e.g. 1%).
- Max daily / weekly loss — then stop trading.
- Max open positions / correlated exposure.
Written rules beat willpower. The market will test you; preset limits do not flinch.
✅ Key Takeaways
- Measure everything in R.
- Higher RR tolerates lower win rate.
- Positive expectancy is the goal — across a large sample.
- Avoiding deep drawdowns is mathematically critical.
⚠️ Common Mistakes
- Judging a strategy on a handful of trades.
- Ignoring correlation between positions.
- Having no daily loss limit.
🧠 Quick Quiz
Lock in the lesson — answer, then check your score.
Keep The Momentum.
Finish the track, take the quizzes, and come back to these notes before your next session.