Tools investors need to know: How to use the RR Ratio for real profit

In the investment and trading industry, everyone talks about the RR Ratio (Risk Reward Ratio) as if it were sacred. However, most people do not truly understand what the RR Ratio is and how to use it effectively.

What is the RR Ratio? Why do traders need to care?

RR Ratio (Risk Reward Ratio) is the ratio between the amount of money we risk (Risk) and the amount of money we want to gain (Reward). Simply put: if we risk 100 baht to aim for a 200 baht profit, our RR Ratio is 1:2.

Its importance is that it tells us whether a trade or investment is worthwhile. Suppose there are two investment options:

• Option A: risk 50% to aim for 20% profit
• Option B: risk 5% to aim for 10% profit

Looking at just the numbers, it seems Option A offers higher returns, but when calculating the RR Ratio, it becomes clear that Option B is many times more worthwhile (RR = 2 versus 0.4).

How to correctly calculate the RR Ratio

The formula is very simple:

RR Ratio = (Target Price - Entry Price) / (Entry Price - Stop Loss Price)

For example: if we want to buy BTS stock at 7.45 baht, set a target at 10.50 baht, and a Stop Loss at 4.50 baht, then:

• RR Ratio = (10.50 - 7.45) / (7.45 - 4.50)
• RR Ratio = 3.05 / 2.95
• RR Ratio ≈ 1.03

This result of 1.03 means that if we win, we gain slightly more than what we might lose, at a ratio of 1.03, which is considered worthwhile.

Types of risk (Risk) in investing

Risk is not just “price drops,” but includes many types:

• Liquidity Risk: inability to sell when you want
• Correlation Risk: multiple assets declining simultaneously
• Currency Risk: changes in currency value
• Interest Rate Risk: interest rate fluctuations reducing returns
• Inflation Risk: inflation eroding value
• Political Risk: political events impacting business

What is a good RR Ratio? What values should you buy?

If you are a professional, an RR Ratio of 2 or higher is considered attractive because it indicates:

• RR = 1:1 → risk 1 unit to gain 1 unit (not very suitable)
• RR = 1:2 → risk 1 unit to gain 2 units (good)
• RR = 1:3 → risk 1 unit to gain 3 units (very good)

However, a high RR is not always better because profits are harder to achieve. Conversely, a low RR can still be profitable if traders have a high Win Rate (success rate).

Win Rate and RR Ratio: an inverse relationship

This is a crucial point: the higher the RR, the lower the Win Rate must be

Example: if you use RR = 3:1 and Win Rate = 25%

Trading 100 times:

• 25 wins × 3 = profit of 75 units
• 75 losses × 1 = loss of 75 units
• Result: break-even (must have more than 25% Win Rate to profit)

Minimum Win Rate table:

If your Win Rate is low, you need a high RR to compensate. If your Win Rate is high, you can use a lower RR.

How to use RR Ratio in professional money management

( 1. Use strict Stop Loss

The RR Ratio helps you set reasonable Stop Loss levels, not random ones. If you accept a 50% risk of your capital, set your Stop Loss accordingly and calculate the RR properly.

) 2. Choose trades that are worthwhile

Not every trade is worth taking. Use the RR Ratio to filter only those with sufficient reward. If the RR is below 1.5, skip the trade.

( 3. Assess long-term drawdown

If you have a Win Rate of 60% but a high RR, you must be mentally prepared for long losing streaks. Manage your capital wisely.

Summary: RR Ratio is the key to sustainable trading

Risk Reward Ratio is not just a number; it is a tool that tells you:

• Whether your investment is worthwhile
• Whether your Stop Loss is well-placed
• What Win Rate you need to be profitable

Those who understand and effectively use the RR Ratio will have an advantage in making investment decisions, whether buying Bitcoin, Ethereum, or other assets.

Most importantly: Avoid trading randomly. Check the RR Ratio first. Remember, a high RR does not guarantee profits, but it helps you “choose the equation that favors winning” in the long run.