I just noticed that many beginner traders still don't pay much attention to the RR ratio, which is really a shame because it is a very useful indicator for making better investment decisions.

Risk Reward Ratio or RR is the comparison between the potential risk of loss and the expected return. Suppose we have two investment options; the first one is better than the second, but when looking at the RR ratio, it might not be the case. For example, Company A's stock is expected to gain 20% but risks a 50% loss, compared to Company B's stock, which is expected to gain 10% but only risks a 5% loss. Calculating the RR shows that the second option is better.

Calculating RR is straightforward: (Target Price - Entry Price) divided by (Entry Price - Stop Loss Price). For example, in a real scenario, BTS stock closed at 7.45 baht, with a target of 10.50 baht and a stop loss at 4.50 baht. The RR would be (10.50 - 7.45) / (7.45 - 4.50) = 3.05 / 2.95 ≈ 1.03. This means that risking 1 baht has a chance to return 1.03 baht, which is quite worthwhile.

Here's the interesting part: the best RR should be 2 or higher. Why? Because it shows that we are risking less but aiming for higher profits. But more importantly, the RR must be related to our system's Win Rate. If RR is high but Win Rate is low, losses can still occur.

I saw an interesting table: RR 3:1 requires a Win Rate of at least 25% to avoid losses. RR 2:1 needs at least 33%. RR 1:1 requires at least 50%. This explains why professional traders place so much importance on the Risk Reward Ratio.

Good risk management involves choosing strategies with a favorable RR, setting clear Stop Loss levels, and checking whether our Win Rate aligns with the chosen RR. If we do this, even with frequent losses, we can still make profits in the long run because the gains from winning trades outweigh the losses from losing trades.

In simple terms, the RR ratio is an essential tool that should not be overlooked. Anyone serious about trading or investing should learn it well because it helps make smarter decisions.