I've just noticed that many people still don't fully understand RR (Risk Reward Ratio), even though it's a tool that can significantly impact your portfolio returns.

Honestly, if you trade forex or stocks and don't look at RR, it's like driving blindfolded. The most important thing is that it's not difficult at all—just knowing how to think about it.

Forex RR is the ratio between the expected profit and the possible loss. The simple formula is (target price - entry price) divided by (entry price - Stop Loss). That's it.

An interesting point is that RR and Win Rate are opposite. If RR is high (like 3:1), the Win Rate doesn't need to be as high as 25% to be profitable. But if RR is low (1:1), you need a Win Rate of at least 50% to make a profit. This is why professionals always set tight Stop Losses.

A clear example: suppose you invest in two stocks. The first expects a 20% gain but risks 50%. The second expects a 10% gain but risks only 5%. Without considering RR, you'd think the first is better. But when calculating RR, the second has an RR of 2, while the first has an RR of 0.4. See? The second one is much more worthwhile.

The best RR value is 2 or higher, meaning you're risking 1 dollar to potentially gain 2 dollars or more. If it's lower, the risk outweighs the reward, which isn't worth it.

Actually, RR is a filter that helps you select only trades or investments that are worthwhile. Some people win only 25% of their trades but still make a profit because of a good RR. Others win 70% but lose overall because of a poor RR. So, don't just look at Win Rate; consider RR as well.

If you're a forex or stock market trader, try opening a spreadsheet to calculate the RR of your last 10 trades. See what your average RR is—that will tell you whether your system is good or not.