Have you ever wondered why professional traders look at RR before making an investment? RR is the ratio between the expected return and the potential risk, but it’s far more important than what that number alone suggests.

Imagine this scenario: there are 2 investment options. The first has a 20% chance of profit, but it could lead to a loss of up to 50%. The second has a 10% chance of profit, but the risk is only 5%. If you look only at the profit figures, most people would choose the first option. But once you calculate RR, you’ll find the second one is much better. The RR of the first option is 0.4, while the second is 2—this is the difference between an investment that’s worth it and just gambling with money.

RR also helps with risk management. When you know how much return corresponds to every 1 baht of risk, you can set a Stop Loss for a sensible reason—not randomly. For example, if RR equals 2 and you accept a 50% risk, you can confidently set your Stop Loss at that level.

The RR calculation formula is fairly simple: RR = (Target Price - Entry Price) divided by (Entry Price - Stop Loss Price). For example, invest in a stock that closed at 7.45 baht, expect a target of 10.50 baht, and set a Stop Loss at 4.50 baht. The RR would be (10.50 - 7.45) divided by (7.45 - 4.50), which comes out to approximately 1.03—showing that this investment is reasonably worthwhile.

However, RR is not a number where “the higher, the better.” Usually, RR of 2 or more is considered good. But very high RR often comes with a low win rate. The relationship between the two is inverse: if RR is high, the win rate must be high enough to keep you profitable. For instance, if RR = 3:1, you need a win rate of at least 25% so you don’t end up losing.

What you need to remember is that RR is only a decision-making tool. It should be used together with other factors, such as business fundamentals, market volatility, and your own trading system. You shouldn’t make investment decisions just because the RR is high. Many people with a high win rate can still profit even with a low RR. The key is managing risk in a way that matches your own potential.