What is RR? The key to making smart investment choices

If you are an investor or trader, you’ve probably asked yourself at least once in your life, “Is this investment worth the risk?” The answer depends on understanding what RR is, which is a simple yet powerful tool to measure the profitability of an investment.

Why is RR Important for Investment Decisions

Risk Reward Ratio (RR) is not just a mathematical figure; it’s a decision-making aid that answers, “For every 1 baht I risk losing, how many baht can I expect to gain?” Professional traders focus on RR for three main reasons:

1. Accurately compare the value of different opportunities

Suppose you encounter two investment options: one offers a 20% return but with a 50% risk of loss, and the other offers a 10% return with only a 5% risk of loss. At first glance, the first might seem more profitable. But calculating RR reveals that the second has an RR of 2.0, much higher than the first’s 0.4. This means the second opportunity is more favorable relative to its risk.

2. Systematically control risk

Investors can set a stop-loss at an acceptable level and use RR to evaluate whether the expected profit justifies the risk. This approach effectively limits potential losses.

3. Increase long-term success chances

Experienced investors know not every trade wins. By choosing a good RR, they ensure that each winning trade’s gains are enough to offset losses from losing trades.

How to Calculate RR with Clear Examples

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

Components:

• Target Price = the price you expect the asset to reach
• Entry Price = the price at which you buy
• Stop Loss Price = the price you set to exit to prevent further loss

Real Example: BTS Stock

Suppose you decide to invest in BTS (BTS Group Holdings) with:

• Current price: 7.45 THB
• Target price: 10.50 THB
• Stop Loss: 4.50 THB

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

This means: if the investment succeeds, you gain about 1.03 times your risk, indicating the investment is worthwhile.

What is a Good RR? – Blueprint for Profit

The ideal RR is 2 or higher, meaning you expect to make twice the amount you risk. However, lower RR isn’t necessarily bad:

• RR = 1:1 = suitable for beginners or conservative investors, but requires a high win rate to be profitable.
• RR = 1.0 – 1.99 = moderate, suitable for balanced risk-reward preferences.
• RR ≥ 2 = high, suitable for those comfortable with higher risk for bigger gains.

RR and Win Rate – The Reality Investors Must Know

It can be confusing: high RR but low Win Rate. For example, with RR = 3:1 and Win Rate = 25%:

• Wins: 25 × 3 = 75
• Losses: 75 × 1 = 75
• Break-even point

Thus, with RR = 3:1, you only need at least a 25% win rate to be profitable.

Minimum Win Rate based on RR:

RR and Win Rate are inversely related: higher RR means lower required Win Rate, and vice versa.

Types of Risks Investors Must Understand

When talking about “risk” in RR calculations, it’s not just about the price dropping. It includes other risks such as:

• Liquidity risk: inability to sell when desired
• Currency risk: exchange rate fluctuations affecting foreign investments
• Interest rate risk: changes impacting asset value
• Inflation risk: loss of purchasing power
• Political risk: political events affecting markets

Professional Tips for Choosing RR

Beginners:
Aim for at least 1.5:1 to allow room for analysis errors.

Intermediate traders:
Target RR ≥ 2:1, aligning with sound risk-reward principles.

Experienced traders with proven systems:
May accept RR below 1:1 if they have a high Win Rate (above 50-60%).

Summary: What is RR and Why Is It Important?

RR is the ratio of expected return to potential risk. It’s a tool that helps you make smarter investment decisions instead of relying on gut feelings.

Understanding and applying RR correctly can be a key factor distinguishing long-term successful investors from those who lose money. Use RR in your next investment decision and see the difference for yourself.