When it comes to investing, many people might only think about how much profit they can make, but forget that there is also risk involved. This is where the risk reward ratio comes in—it’s an essential tool that professional traders need to use.

So what exactly is the risk reward ratio? It’s the ratio between the risk and the expected return. Simply put, if we risk 1 baht, how many baht should we expect to get back in return? If the RR is high, it means the investment is worthwhile—because the risk is low, but you’re hoping for a big profit. If the RR is low, it means you’re taking on a high risk, but only a small profit.

Why do we need to use the risk reward ratio? Because it helps us make better decisions. Imagine there are two investment options. The first expects a 20% profit, but you could lose 50%. The second expects a 10% profit, but you could lose only 5%. The first one looks better at first glance—but when you calculate the RR, you’ll find that the second one has the higher RR, which is 2 compared with 0.4. That means the second option is more worthwhile.

The calculation is very straightforward. The formula is RR equals (target price minus purchase price) divided by (purchase price minus Stop Loss). For example, if you invest in BTS stock at 7.45 baht, with an expected target price of 10.50 baht, and set a Stop Loss at 4.50 baht, then the RR is (10.50 minus 7.45) divided by (7.45 minus 4.50). That equals 3.05 divided by 2.95, which is approximately 1.03—meaning this investment is worthwhile.

Another important point is that the risk reward ratio must be considered together with the system’s Win Rate. If the RR is high, the Win Rate is low—and vice versa. For example, if you use an RR of 3 to 1 and a Win Rate of 25%, and you trade 100 times, you would win 25 times and earn a profit of 75, but you would lose 75 times and take losses of 75, which cancel each other out. So you need a Win Rate higher than 25% to actually make a profit.

The best RR value is 2 or higher, because it indicates that the investment is worthwhile. If the RR is lower than that, the risk is greater than the potential return you would get—but you should also consider other factors, such as business fundamentals, market volatility, and your own system’s Win Rate.

Finally, the risk reward ratio is an important tool for traders and investors. Use it to make better decisions, reduce risk, and increase the chances of success. However, don’t forget that you must use it together with other indicators to truly achieve stable and sustainable investments.