Why should you know about RR? From principles to practical application

All traders and investors face the same problem: Will I make a profit or not? The answer doesn’t depend on guessing but on analyzing the Risk Reward Ratio (RR) properly. This ratio tells us what RR is and how to use it to make more profitable decisions.

Why are RR and Win Rate opposite?

A truth many overlook is that RR and Win Rate are inversely related. If you want a higher chance of winning, you must accept a lower RR, and if you want a higher RR, you must accept a lower chance of winning.

Clear example: Suppose you use an RR of 3:1 with a trading system that has only a 25% Win Rate:

• Trade 100 times = 25 wins + 75 losses
• Profit: 25 × 3 = 75
• Losses: 75 × 1 = 75
• Final result: Break-even

To make a profit, you need at least a 26% Win Rate. Therefore, here is a table to help you think:

Where exactly is the Risk Reward Ratio (RR)?

RR (Risk Reward Ratio) is the ratio between the expected return (Reward) and the potential loss (Risk). This number clearly shows whether an investment or trade is worthwhile. The higher the ratio, the more profitable the investment.

It’s not as complicated as it seems—just compare “How much do I gain if I win?” versus “How much do I lose if I lose?” Only that.

How simple is the RR calculation?

RR = (Target Price – Entry Price) ÷ (Entry Price – Stop Loss)

• Entry Price = The price you buy at
• Target Price = The price you hope to reach (Profit)
• Stop Loss = The price at which you sell to cut losses (Loss)

Real example calculation: Suppose buying BTS stock at 7.45 THB:

• Target Price = 10.50 THB
• Stop Loss = 4.50 THB

RR = (10.50 – 7.45) ÷ (7.45 – 4.50) RR = 3.05 ÷ 2.95 RR ≈ 1.03

Result: If you win, you gain 1.03 times the risk, which is quite reasonable.

How many types of investment risks are there?

Risk (Risk) doesn’t just mean falling prices. There are many types investors should watch out for:

Liquidity Risk - Cannot buy or sell at the desired time
Correlation Risk - Multiple assets fall together
Currency Risk - Currency fluctuations reduce value
Interest Rate Risk - Changes in interest rates lower returns
Inflation Risk - Inflation erodes real value
Political Risk - Political situations negatively impact the market

What is the ideal RR value?

RR = 2 or higher is considered good:

• RR < 1 = Risk exceeds profit; avoid
• RR = 1 = Break-even; suitable for long-term holders
• RR = 1.5 - 2 = Good; suitable for traders accepting moderate risk
• RR > 2 = Very good; suitable for high-risk takers

But most importantly, it must be paired with your own system’s Win Rate to determine if you’ll actually profit.

Why does RR help manage risk effectively?

The importance of RR isn’t just a number but helps to:

1. Evaluate the true value of an investment

When comparing two options:

• Option A: 20% gain but 50% loss (RR = 0.4)
• Option B: 10% gain but 5% loss (RR = 2.0)

Without considering RR, you might choose A because it offers higher gains. But calculating RR shows B is much better due to lower risk.

2. Systematically limit losses

Set a Stop Loss to cap losses, e.g., accept only a 50% loss. With this RR, you can determine what Win Rate is needed to be profitable.

Analyzing RR types for traders at different levels

RR = 1:1
Returns equal to risk. Suitable for beginners who want to trade with confidence, but profits are limited.

RR = 1.5 - 2
Slightly higher returns. Suitable for traders with a decent system and understanding their Win Rate.

RR > 2
High returns. Suitable for professional traders or those with a Win Rate of 30% or higher, because lower Win Rates would not be profitable.

Summary: Why use RR in trading?

RR is a tool that clearly tells you, “Is this investment worthwhile?”

Most successful investors and traders use RR to make decisions. They don’t trade by guesswork but by numbers—this is what allows them to win consistently.

So, before your next trade, calculate your RR. See if it’s worthwhile, and pair it with your system’s Win Rate to know if the trade is worth doing. Keep doing this, and success will come to you.