I just noticed that many people tend to focus only on the potential profits from investing but forget how much risk they have to take to achieve them. This way, investments often fail.

Today, I want to share about the Risk Reward Ratio, which is a metric that helps answer the question, "For every 1 baht I risk losing, how many baht can I expect to gain?" It’s an essential tool frequently used by professional traders.

The Risk Reward Ratio is the ratio between the potential risk and the expected return. The higher the RR, the more worthwhile the investment is because we risk less but stand to gain more. Conversely, a low RR indicates high risk but only a small potential profit.

Imagine two investment options: the first expects a 20% profit but risks a 50% loss; the second expects only a 10% profit but risks just a 5% loss. Looking only at the profit numbers, the first seems better. But when calculating RR, the second has an RR of 2, while the first only has 0.4. Therefore, the second option is much more worthwhile.

The formula for calculating the Risk Reward Ratio is:
RR = (Target Price – Entry Price) / (Entry Price – Stop Loss Price)

For a real example, suppose you buy BTS stock at 7.45 baht, with a target price of 10.50 baht, and set a Stop Loss at 4.50 baht.
RR = (10.50 – 7.45) / (7.45 – 4.50) = 3.05 / 2.95 ≈ 1.03

This means that if the investment succeeds, you will gain about 1.03 times the amount at risk, which is fairly worthwhile.

Why should we pay attention to the Risk Reward Ratio? Because it helps us manage risk better. We can set Stop Loss levels based on our acceptable risk levels to limit losses and prevent losing all our money.

The best RR value recommended is 2 or higher because it indicates a worthwhile investment. If the RR is lower, the investment becomes less attractive.

But here’s an interesting point: RR and Win Rate are inversely related. If RR is high, Win Rate tends to be low; if RR is low, Win Rate tends to be high.

For example, with an RR of 3:1 and a Win Rate of only 25%, trading 100 times with 25 wins and 75 losses results in break-even. Therefore, you need at least a 25% Win Rate to be profitable.

For an RR of 1:1, it means the reward equals the risk. This is suitable for those who accept moderate risk, but if you want real profits, it’s not highly recommended.

An RR greater than 2 means the potential reward exceeds the risk significantly, suitable for those willing to accept high risk—but they should be cautious because the risk of loss is also high.

Actually, a low RR isn’t always bad. Some traders can still profit with a low RR because they have a high Win Rate and precise trading systems.

In summary, the Risk Reward Ratio is an indicator of investment profitability. It should be used as a decision-making aid, combined with other metrics to make better choices. Ultimately, smart investing involves understanding your own risk tolerance first and then seeking worthwhile opportunities.