Position related risk metrics

Risk handling is vital for successful trading, especially on leveraged trading. It helps cut down losses and it helps also to protect trader’s account from loosing all of his or her money. TradingDiary Pro has several risk related metrics like the Risk Analysis report which is Equity/Net Asset Value based. This article describes the position related risk metrics.

In the positions or open positions view there are several risk related columns:

  • Stop
  • Target
  • Initial Risk
  • Initial Risk %
  • Current Risk
  • Current Risk %
  • R Multiple
  • Risk/Reward

Formulae behind the columns

$$\text{Initial Risk} = {(\text{Entry Price} – \text{Stop Price}}) \times \text{Multiplier} \times \text{Quantity} \times \text{Exchange Rate}$$

$$\text{Initial Risk %} = \frac{\text{Initial Risk}}{\text{Equity value at entry date}}$$

$$\text{Current Risk} = {(\text{Current Price} – \text{Stop Price}}) \times \text{Multiplier} \times \text{Quantity} \times \text{Exchange Rate}$$

$$\text{Current Risk %} = \frac{\text{Current Risk}}{\text{Equity value at current date}}$$

$$\text{R Multiple %} = \frac{\text{Net Profit in base}}{\text{Initial Risk}}$$

$$\text{Reward/Reward} = \frac{\text{Reward}}{\text{Risk}} = \frac{|\text{Average Open Price} – \text{Stop Price}|}{|\text{Target Price} – \text{Average Open Price}|}$$

the Initial risk and Current Risk calculation is different for options spreads. These formulae are applied for non spread positions.

Setting Stop loss and target point

The risk metrics calculations need at least one stop level to be added and the risk reward calculations needs target level. To enter stop first expand the position and click on the SL/TP tab of it.

Click on the top empty row and fill the date, price and order type columns. The order type could be a stop or a target.

In the screenshot above the stop is already added. You can see the Initial Risk has been calculated, the Entry Price is $68, the stop price is $65 so the Initial Risk is ($68 – $65) x 100 x 1 x 1 = $300 where hundred is the quantity and the multiplier for stocks is one and the exchange rate is one as well. The equity at 12/28/2020 was $11,381 so the Initial Risk % is 2.6359%. The price of the MS at 1/25/2021 was $72.56. The current risk is ($72.56-$65) x 100 x 1 x 1 which is $756, the equity at 1/25/2021 is $11,989 so the current risk % is 6.31%.

In the next screenshot the target point is set as well. The target is $80, the stop is $65 so the risk/reward, the entry price is $68. The risk/reward is (80-68)/(68-65)=4. You can see the Risk/Reward column is set to 4.

By adding new stop levels the current risk is calculated according to the latest stop but the initial risk is kept unchanged.

The position is closed at $72 as seen in the screenshot below:

The R multiple is calculated after the position has been closed.  $300 or $3 per share risk was taken and the PnL is $400 or $4 per share so the R Multiple is 4/3=1.33.