RR Ratio: An important indicator that traders must understand how to calculate and apply consistently

If you’ve ever wondered whether “this investment is worth it,” the answer might lie in simple numbers like the RR Ratio. This indicator helps tell you how many dollars you could get back for every dollar at risk, making it a primary choice for professional investors and traders when making decisions.

Why the RR Ratio Matters to Professional Investors

Risk Reward Ratio (RR) isn’t just a simple mathematical formula; it’s a sharp thinking process in the investment world. Successful traders look for a good RR not because of high returns but because the investments they choose offer value that justifies the risk taken.

Compare two scenarios: the first offers a 20% chance of profit but a 50% risk of loss; the second offers a 10% profit with only a 5% risk. When calculating the RR Ratio, the second option clearly shows a higher RR (2.0 vs. 0.4). This means the second investment is more worthwhile.

Using the RR Ratio also helps manage risk more precisely because you can set a Stop Loss at an acceptable level, then calculate how many shares to buy so that maximum loss stays within your limit. This way, whether the trade goes as planned or not, you know the maximum amount you’re risking.

How to Correctly Calculate the RR Ratio with Real Market Examples

The formula for RR Ratio is simple but powerful:

RR = (Target Price – Entry Price) / (Entry Price – Stop Loss Price)

Where:

• Target Price = the expected price level
• Entry Price = the purchase price
• Stop Loss Price = the price at which you exit to limit loss

For example, with Thai stock BTS, suppose the latest closing price is 7.45 THB, your target is 10.50 THB, and your Stop Loss is 4.50 THB. The calculation is:

RR = (10.50 – 7.45) / (7.45 – 4.50)
RR = 3.05 / 2.95
RR ≈ 1.03

An RR of 1.03 means that if the trade succeeds, the reward is about 1.03 times the risk. It may not seem high, but if your system’s Win Rate is high, it can still generate consistent profits.

The Relationship Between RR Ratio and Win Rate: The Key to High Profits

One common misconception is that RR Ratio and Win Rate are directly proportional. In fact, they are inversely related: a high RR often means a lower Win Rate, and vice versa.

For example, with an RR of 3:1 and a Win Rate of 25% over 100 trades:

• 25 wins × 3 = 75 units profit
• 75 losses × 1 = 75 units loss
• Net result = 0 (break-even)

This illustrates why knowing your system’s Win Rate is crucial to choosing an appropriate RR Ratio.

Here’s a table showing the minimum Win Rate needed to avoid losses at various RR levels:

Risks in Investing: Types Traders Must Know

Understanding the RR Ratio isn’t complete without knowing the types of risks involved. Smart investors don’t just calculate RR—they identify where risks originate:

• Liquidity Risk: The risk of not being able to buy or sell quickly when needed, common in low-volume stocks.
• Correlation Risk: When assets move together, reducing diversification benefits.
• Currency Risk: For international investments, currency fluctuations can reduce returns.
• Interest Rate Risk: Changes in interest rates affect bond prices and other securities.
• Inflation Risk: Rising prices diminish the real value of your invested money.
• Political Risk: Political instability can decrease asset values.

Choosing the Right RR Ratio: Analytical Approach

The optimal RR depends on your Win Rate and strategy, but general guidelines include:

• RR = 1:1: Equal reward and risk; suitable for risk-averse investors seeking balance. Not ideal for high-profit goals.
• RR between 1 and 2: Reward exceeds risk; good for steady, moderate gains.
• RR > 2: Significantly higher reward than risk; suitable for high-risk tolerance but requires a high Win Rate to avoid losses.

A common misconception is that a higher RR guarantees success. In reality, a high RR means larger wins when you win but also larger losses when you lose. Therefore, it should be combined with other factors like fundamental analysis, market volatility, and trading skills.

Summary: RR Ratio Is a Tool Not to Be Overlooked

The RR Ratio may seem simple, but it often distinguishes successful traders from those who continually lose. By calculating RR correctly, understanding its relationship with Win Rate, and choosing an appropriate RR for your strategy, you can approach investing more systematically.

However, RR Ratio is just one piece of the puzzle. To improve your chances of success, combine it with fundamental analysis, money management, and emotional control. Doing so will strengthen your portfolio and promote sustainable growth.