Just came across an interesting topic for those who want to trade or invest mindfully—that is, calculating RR, which stands for Risk Reward Ratio.

Actually, RR is a tool that helps answer an important question: for every dollar you risk, how much can you expect to gain back? It seems simple, but in reality, it has a huge impact on your portfolio.

Let me give a simple example. Suppose you have two investment options: the first option expects a 20% profit but risks a 50% loss; the second option expects a 10% profit but risks only a 5% loss. If you only look at the expected returns, the first option seems better. But when you calculate RR, which is the ratio of potential reward to risk, the second option actually turns out to be more worthwhile.

The calculation formula is straightforward: RR equals (Target Price minus Purchase Price) divided by (Purchase Price minus Stop Loss Price). For example, if you buy a stock at 100 baht, set a target at 150 baht, and a Stop Loss at 80 baht, then RR equals 50 divided by 20, which equals 2.5.

An RR of 2.5 means that for every baht you risk, you have the potential to gain 2.5 baht. That’s a worthwhile investment.

Professional traders emphasize RR because it helps manage risk effectively. You can set your Stop Loss according to your acceptable risk level, and once you calculate RR, you’ll know whether the trade is worth it.

Most importantly, RR should be greater than 1. If RR equals 1, it means the risk equals the reward, which isn’t very good. But if RR is higher than 2, that’s considered a good investment.

However, that’s not all. RR must be considered together with your Win Rate. If you have an RR of 3 but only a 20% Win Rate, it might not be enough. You need at least a 25% Win Rate to make the investment profitable.

In simple terms, RR is a key indicator that shows how worthwhile your investment is. If you want to trade mindfully and reduce risk, you should prioritize RR first, along with other analyses, to make more accurate decisions.