RR is what you need to know for smart investment decisions

When faced with two investment options, which one would you choose? An investment with a 20% profit potential but a 50% loss risk, or an investment expecting a 10% profit with only a 5% loss risk? Just looking at the return numbers, you might pick the first option. But using the RR analysis tool, you’ll find it might not be the best choice. RR is a key tool that helps professional investors make prudent decisions because it accurately measures the return per unit of risk.

Real Example: Why RR Matters to Your Returns

Suppose you’re analyzing BTS Group Holdings Public Company Limited stock, closing at 7.45 THB per share. You forecast the price will rise to 10.50 THB, with a Stop Loss set at 4.50 THB. Here, your RR is 1.03, indicating that if the investment succeeds, the return exceeds the risk by approximately 1.03 times.

Compare this with two types of investments: the first with a 20% expected profit and a 50% risk of loss (RR = 0.4), and the second with a 10% expected profit and a 5% risk of loss (RR = 2). Looking only at the return figures, the first seems better. But using RR as a measure, you’ll see that the second investment is much more worthwhile. This is why professional traders prioritize this tool.

What is RR? The Ratio That Changes How Professionals Think

What exactly is RR? The Risk-Reward Ratio (RR) compares the expected return (Reward) to the amount you’re willing to risk (Risk). The formula answers the question each investor should ask: “When I risk 1 dollar, how many dollars can I potentially gain?”

A higher RR means the investment is more worthwhile because the potential reward exceeds the risk. A lower RR indicates higher risk relative to expected reward. However, RR is just a tool for measurement, not a decision-making rule. It should be considered alongside other factors of the investment.

Using RR to Assess True Value

Effective risk management depends on how well you use RR. When you set your Stop Loss at an acceptable risk level, RR helps you see whether the investment is justified. For example, if you’re willing to risk 50% of your capital and invest in an asset with an RR of 2.0, it means that if successful, you’ll gain 100%, with a maximum risk of only 50%.

Basic and Advanced RR Calculations

The main formula for RR is:

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

• Target Price: The price you expect the asset to reach
• Entry Price: Your purchase point
• Stop Loss Price: The point where you decide to exit to minimize loss

Step-by-step RR Calculation Example

Using BTS at 7.45 THB, with a target of 10.50 THB and Stop Loss at 4.50 THB:

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

This indicates that if the investment succeeds, the return exceeds the risk by about 1.03 times, representing a moderately worthwhile investment.

Differences Between RR Values and How to Use Them

RR = 1:1 means the potential reward equals the risk. Suitable for conservative investors but yields limited profit.

RR > 1 indicates the reward exceeds the risk. Professional traders often choose RR = 1.5 to 3 or higher, depending on their risk appetite.

RR > 2 is considered optimal because the potential reward significantly outweighs the risk. However, setting realistic target prices is essential.

The Hidden Relationship Between RR and Win Rate

RR and Win Rate are inversely related. Higher RR typically means a lower Win Rate, and vice versa.

Example Calculation: RR = 3:1 with a Win Rate of 25%

Suppose you trade 100 times, winning 25 times:

• Wins: 25 × 3 = 75 units profit
• Losses: 75 × 1 = 75 units loss
• Net result: 75 – 75 = 0 (break-even)

To make a profit, your Win Rate must be at least 26%.

Minimum Win Rate Table Based on RR

This table shows that higher RR allows for a lower Win Rate to still be profitable, enabling traders with lower Win Rates to succeed.

Which RR Is Suitable for Different Types of Investors

Conservative Investors
Prefer RR = 1:1 to 1.5:1 to minimize risk, even if profits are modest.

Moderate Investors
Choose RR = 2:1 to 3:1 for balanced risk and consistent returns.

Aggressive Investors
Opt for RR > 3:1, accepting higher risk for higher potential rewards, especially if they have high Win Rates and precise trading systems.

Important: RR is just one indicator. It should be combined with Win Rate, fundamental analysis, market volatility, and personal risk management strategies.

Multi-Dimensional Risk Assessment

Beyond RR, investors should understand other risk types:

• Liquidity Risk: Difficulty selling assets quickly
• Correlation Risk: Multiple assets moving in the same direction, reducing diversification benefits
• Currency Risk: Fluctuations in exchange rates affecting investment value
• Interest Rate Risk: Changes in interest rates impacting bond and other asset returns
• Inflation Risk: Erosion of purchasing power
• Political Risk: Political events affecting asset values

Professional Analysis of RR: How to Choose the Right One

When RR = 1:1
Returns equal risks. To profit long-term, a Win Rate above 50% is necessary. This requires high skill.

When RR = 1.5:1 to 2:1
A good balance for most investors, with Win Rates around 33–40% sufficient for sustainable profits.

When RR > 2:1
Suitable for experienced traders with proven systems, even with Win Rates as low as 25%. Patience and careful planning are essential.

Summary: RR as a Gateway to Smarter Investing

RR is a ratio indicating how worthwhile an investment or trading strategy is. It answers: “How much return can I expect relative to the risk I take?”

Higher RR (2:1 or more) suggests a more favorable investment. Lower RR indicates higher risk relative to reward, requiring a higher Win Rate to be profitable.

Professional traders prioritize RR as a primary decision tool because it provides clear, quantifiable insights. However, RR is just one piece of the puzzle. Combining it with Win Rate, fundamental analysis, market volatility, and personal risk management leads to more informed and prudent investment decisions.