I just realized why professional traders seem not to focus on simple profit and loss figures. They think about RR, the Risk Reward Ratio, from the very beginning, which is something that can truly change the game of investing.

RR is the ratio between the risk we might lose and the profit we hope to gain. It answers the simple question: for every 1 baht risked, how many baht can we potentially gain back? A high RR indicates that we risk less but stand to gain more, and that’s exactly what everyone wants.

Let’s look at a real example. Suppose there are two investment options: the first is a stock of company A with a target profit of 20% but a risk of losing 50%, and the second is a stock of company B with a target profit of 10% but only a 5% risk of loss. If we only look at the profit figures, most people would choose A because 20% looks better than 10%. But when considering RR, B is better because it has an RR of 2, compared to A’s RR of only 0.4.

The calculation formula is not complicated: RR equals (Target Price minus Entry Price) divided by (Entry Price minus Stop Loss Price). For example, using BTS stock, which closed at 7.45 baht, aiming for 10.50 baht, and setting a Stop Loss at 4.50 baht.

Calculation: (10.50 - 7.45) / (7.45 - 4.50) = 3.05 / 2.95 ≈ 1.03. So, BTS’s RR is 1.03, meaning if the investment succeeds, the return will be about 1.03 times the risk.

Why is RR important? Because it helps us manage risk better. We can set Stop Loss levels based on acceptable risk levels. If we set a risk of 50% and invest in an asset with an RR of 2.0, we know the maximum loss is only 50% of the invested amount.

The best RR value is 2 or higher because it indicates a worthwhile investment. If it’s lower, the risk outweighs the reward. But remember, RR must be considered together with Win Rate.

The relationship between RR and Win Rate is inverse. If RR is high, Win Rate tends to be lower. For example, with an RR of 3:1 and a Win Rate of 25%, trading 100 times, winning 25 trades yields a profit of 75, while losing 75 trades results in a loss of 75, which breaks even. Therefore, a Win Rate of at least 25% is needed to make a profit.

Professional RR analysis: if RR = 1:1, the return equals the risk, suitable for those willing to accept moderate risk. If RR > 1, the return exceeds the risk, suitable for those seeking higher returns. If RR > 2, the return is much higher than the risk, suitable for high-risk tolerance.

However, a very high RR isn’t always good because the risk is also high. Conversely, a low RR isn’t necessarily bad; some can profit even with assets that have a low RR, but they need skill, precise systems, and a high Win Rate.

In summary, RR is a crucial tool for decision-making in investing or choosing trading strategies. Thinking carefully about RR can significantly increase your chances of success. But it should be considered alongside other factors such as business fundamentals, market volatility, and your own trading system’s Win Rate to make the best decision.