R-Tracking, where ‘R’ stands for risk, takes a straightforward approach to trading by focusing on risk assessment and management. Rather than delving into complex algorithms and intricate data analytics, R-Tracking centers around understanding and measuring the risk associated with any given trade.

A quick example shows this in action:

You buy the Apple stock (ticker: AAPL) at 100$ per share and set a stop-loss order at the 90$ level. Your R here is then 10$ (per share).

Later you sell the stock at 120$ for a gain of 20$ in dollar-terms, which represents a 20$ win per share.

This represents a 2 R win.

Why is this important?

R-tracking in important and effective because it gives a clear and concise perspective on trade outcomes. If you hear someone has made 20$ on a trade, this could be a fantastic 200 % return on a 10$ position or it could be a 2% return on a 1000$ position. Percentages are somewhat mere meaningful than absolute returns, but can also be misleading. Making 20% on a blue chip stock is good, but the same return on a high-risk OTC stock is way less impressive because the risk was much higher.

Both limitations above can be handled by using R-tracking. 

Key Components of R-Tracking:

1. Risk Definition:
   The cornerstone of R-Tracking is the clear definition of risk, denoted as ‘R.’ Traders identify and quantify the level of risk they are willing to take on a particular trade. This simple yet crucial step forms the foundation for subsequent decision-making.
2. Trade Outcome Analysis:
   R-Tracking involves measuring trade results relative to the predefined risk (‘R’). Traders evaluate how well their trades align with their risk tolerance, allowing for a straightforward assessment of the success or failure of each trade.
3. Risk Adjustments:
   Based on the analysis of trade outcomes, traders can make necessary adjustments to their risk approach. If a trade exceeds the predetermined risk level, adjustments can be made to mitigate future risks and optimize the overall risk-reward profile.

Practical Applications of R-Tracking in Trading:

1. Clear Risk Management:
   R-Tracking provides a clear and uncomplicated framework for risk management. Traders can make informed decisions by aligning their risk tolerance with actual trade outcomes, ensuring a more disciplined and controlled approach to trading.
2. Performance Evaluation:
   By consistently measuring trade results against the predefined risk (‘R’), traders can objectively evaluate their performance. This straightforward analysis helps in identifying strengths, weaknesses, and areas for improvement in their trading strategy.
3. Adaptive Decision-Making:
   R-Tracking encourages adaptive decision-making. Traders can learn from past trade outcomes and make real-time adjustments to their risk approach, allowing for a more agile and responsive trading strategy.