The most important thing in a bet is it’s R-multiple over a series of similar bets. Your R-multiple determines your margin of error. Margin of error is an amount of errors you can afford, a better way of putting it. It’s the number of losing bets you can afford to take on a series of bets. The R-multiple is directly correlated to the margin of error. The higher the R-multiple. The larger the margin of error. The inverse is true.
R-multiple = average win / average loss
Sidenote: this is how casinos quantify their edge and are profitable as a result. Their average win is bigger than the average loss on all bets placed everyday at the casino. As a trader your goal is to trade like a casino.
Another important type of R-Multiple is what I call R-multiple of the extreme or eR-multiple for short.
eR-multiple = largest win / largest loss.
eR-multiple is directly correlated with how big you let your wins and losses be.
If eR-multiple is lower than your R-multiple. It most likely means that you had a bet where you ran a loss for much longer than you should have, or at the very least it means you had a loss that’s larger than normal. Notwithstanding slippage, that’s just luck. It means you have to check your bets, to see if this was an anomaly or a tendency.
The closer eR-multiple is to zero the more likely it is that it was not an anomaly. You either had/have a position sizing problem or failure to take a loss while was/it’s still small. Point is some investigation into the system,beliefs, trading habits/behaviour, errors etc. Is warranted. Because eR-multiple only uses a sample size of 2. It could also be a fixed problem, but investigate
The further away it is from 0. It means you have a good habit of letting your winner be as big as it can get. Without doing the same with the losses. It means your losses are well contained within the average loss size.
Often you will find that the problem has nothing to do with the system but with trading habits and beliefs resulting in basic trading errors such as running losses longer than you should. Pushing more chips than you can afford to lose. Trading in a bad mental space etc. Occasionally the system will be a problem.
You can’t fix a problem if you don’t know it exists. Just as you can’t fix a problem with the same thinking and beliefs that brought the problem in the first place. Even if the problem is already solved or the solution is within touching distance. You would not recognise that fact if you weren’t aware of the problem. This is why it’s very important to understand for yourself what is or isn’t a problem. Or at least have something(s) that inform you that there’s a problem. Just as an athlete can often feel his hamstring is troubled, before it gets worse. The R-Multiple and the eR-multiple are just 2 examples for myself. You need one for yourself
Sidenote: The last paragraph applies to life too