Yesterday, I was asked by a fellow trader, "Why should I pay attention to RR? What is it, and why is it so important in making investment decisions?" And that hits the point exactly, because really, what is RR? That’s the key that many people overlook.

RR stands for Risk Reward Ratio, which simply means "the ratio between the amount of money we risk losing and the amount we hope to gain." That's it. Some people see it as just a number, but it’s not, because it determines whether an investment is worth it or not. I’ve seen many who don’t care about what RR is, and end up losing money because they take high risks but hope for small gains.

Suppose you have two investment options: the first aims for a 20% profit but risks a 50% loss; the second aims for a 10% profit but risks only a 5% loss. If you only look at the profit numbers, most people would choose the first. But if you calculate RR, you'll see that the second one is better because its RR is 2, compared to 0.4.

Calculating RR isn’t complicated. The formula is (Target Price - Purchase Price) divided by (Purchase Price - Stop Loss Price). Let’s take a real example: if we buy BTS stock at 7.45 baht, set a target at 10.50 baht, and a Stop Loss at 4.50 baht, then RR = (10.50 - 7.45) / (7.45 - 4.50) = 3.05 / 2.95 ≈ 1.03.

An RR of 1.03 is still acceptable, but in reality, most professionals talk about what constitutes a good RR. Ideally, it should be 2 or higher. An RR of 2 means that when we win, we make twice the amount of our risk. If RR is only 1, it means we risk the same amount to gain the same, which isn’t worth it.

This is where it gets interesting: high RR should be paired with a low Win Rate. If our RR is 3:1, we need at least a 25% Win Rate to avoid losing money. If the Win Rate is lower, we can still lose money. Conversely, if RR is 1:1, we need a Win Rate of at least 50% to be profitable.

What I want you to understand is that RR is not the only indicator. It should be considered together with your trading system’s Win Rate. I’ve seen people with high RR but very low Win Rate still losing money continuously, while others with low RR but high Win Rate are making good profits.

Most importantly, RR helps us set the correct Stop Loss. If we know how much we’re willing to risk, we can determine where to place the Stop Loss. It helps prevent big losses. I usually prefer trading setups with an RR of at least 1.5 or higher, as a way to protect myself.

In simple summary, what is RR? It’s a tool that tells us whether the money we risk is worth it. If RR is high, it’s worth it; if low, it’s not. But it should be considered alongside other factors like the system’s Win Rate, market volatility, and our strategy. For those who haven’t paid attention to what RR is, I recommend starting now, because it will significantly improve the efficiency of your investments.