Many traders often talk about RR (Risk Reward Ratio). What exactly is RR in forex, and why is it so important for making trading decisions?

Actually, RR is the ratio between the return we expect and the risk we are willing to take. The formula is simple: RR = (Target Price - Entry Price) / (Entry Price - Stop Loss).

But why should we care so much about RR? Think about this: suppose there are 2 investment options. The first expects a 20% profit but risks a 50% loss. The second expects a 10% profit but risks only 5%. If you look only at the profit percentage, the first one seems like it will win for sure. But if you calculate RR, you’ll see that the second has RR = 2, while the first has only 0.4. The second is much better.

A good RR should be 2 or higher. If it’s lower than that, the risk becomes greater than the potential return, which isn’t worth it. But this isn’t a hard rule, because RR also needs to be considered together with the Win Rate.

For example, if you trade with RR = 3:1 and Win Rate = 25%, let’s calculate it. If you trade 100 times, you win 25 times and make a total profit of 75, but you lose 75 times and take a total loss of 75—resulting in zero net profit. Therefore, with RR = 3:1, you need a Win Rate of at least 25% to actually be able to keep profits.

In reality, RR in forex and trading in general follow the same principle. It helps traders measure how worthwhile a trade is in a clear, concrete way—not by relying on feelings. Anyone who has traded for real will know that a low RR, even if you win often, still may not be able to generate profits. Meanwhile, if the RR is high enough, even if you don’t win very frequently, you can still achieve good profits.

The key is choosing between high RR with a low Win Rate, or low RR with a high Win Rate—and then selecting what fits your own trading style. By combining RR with other indicators such as Fundamentals and your own strategy, you can trade with more confidence.