What is the RR value and how is it calculated in actual trading?

In trading and investing, there is one tool that all professionals must use: the Risk Reward Ratio or RR. It helps traders make smart decisions about whether “this trade is worth risking.” The RR is a key that opens the door to sustainable profits and effective risk management.

Understanding the Risk Reward Ratio Clearly

In trading, the “Risk Reward Ratio” or RR is the ratio comparing the amount of money you risk losing (Risk) to the amount you expect to gain (Reward). It’s like asking yourself, “For every dollar I risk, how many dollars could I potentially make?”

A high RR means less risk but higher reward (risk $1, aiming for $3 profit), while a low RR indicates higher risk but lower reward (risk $3, aiming for $1 profit). These are essential concepts for professional traders to understand to make their trading more rational.

Why do professionals prioritize RR first?

Helps evaluate investment choices appropriately

Suppose you have two trading options: the first has a 20% chance of profit but a 50% chance of loss; the second has a 10% chance of profit but only a 5% chance of loss. At first glance, the first seems better. But when calculating RR:

• First option: RR = 20% / 50% = 0.4
• Second option: RR = 10% / 5% = 2.0

Here, RR reveals that the second option is much more worthwhile because the potential reward clearly outweighs the risk. RR helps prevent you from making decisions based on “attractive-looking” profits alone, which could lead to losses due to hidden risks.

Systematic risk control

RR allows you to set reasonable Stop Loss levels. If you’re willing to accept a 50% loss of your capital and the RR of that trade is 2.0, you can set your Stop Loss at 50% and target a profit of 100% (to maintain a 2:1 ratio). This way, you know where the “risk zone” is and where the “chance to win” lies. Such management makes your portfolio more stable.

Calculating RR accurately in just a few steps

The formula for RR is straightforward:

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

For example, with BTS stock closing at 7.45 THB, expecting it to rise to 10.50 THB, and setting a Stop Loss at 4.50 THB:

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

This means if the trade succeeds, you gain slightly more than your risk (about 1.03 times). While not very high, it’s still a tradable RR.

When is an RR worth investing in?

Most professionals recommend an RR of ≥ 2, indicating the expected reward is at least twice the risk. This ensures the potential gains justify the risks taken.

If RR is lower (like 0.8 or 1.2), it doesn’t mean the trade is bad; rather, you need a higher Win Rate to stay profitable. This is where the relationship between RR and Win Rate becomes crucial.

Risks traders should be aware of

Investment risks come in many forms. You need to recognize which types you’re facing:

• Liquidity Risk: The risk of not being able to buy or sell when you want because there are no buyers or sellers.
• Correlation Risk: The risk that multiple assets you invest in move in the same direction, reducing diversification benefits.
• Currency Risk: The risk from exchange rate fluctuations if investing in foreign currencies.
• Interest Rate Risk: The risk from changes in interest rates affecting bond prices and fixed-income assets.
• Inflation Risk: The risk that inflation erodes your money’s purchasing power.
• Political Risk: Risks arising from political events or instability affecting markets.

The relationship between RR and Win Rate that traders must understand

Here’s an interesting point: RR and Win Rate are inversely related. To achieve a high RR (less risk, bigger reward), you often need to accept a lower Win Rate. For example, with an RR of 3:1 (risk $1, aiming for $3), you might only need a Win Rate of 25-30% to be profitable.

Example: If you trade 100 times with RR = 3:1 and Win Rate = 25%:

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

This shows that with a high RR, even a low Win Rate can still lead to profitability.

Analyzing RR with real strategies

When RR = 1:1

Risk equals reward. Suitable for beginners testing the waters. But for long-term profits, this is weak because you’d need a 50% Win Rate to break even. Plus, transaction fees make it even harder.

When RR = 1.5:1 to 2:1

Ideal for traders with a solid system. A Win Rate of 33-40% is enough. Your risk-reward structure begins to favor profitability.

When RR > 2:1

Suitable for experienced traders confident in their analysis. Win Rate doesn’t need to be high; even 20-25% can be profitable. But high RR requires patience, as opportunities with such favorable ratios are less frequent.

Summary: RR is a trader’s intelligence system

RR is the ratio comparing risk to reward, answering “Is this trade worth it?” The higher the RR, the less you risk and the more you stand to gain, making sustainable investing more feasible.

Knowing what RR is and calculating it correctly are skills that distinguish successful traders from those who lose money month after month. When you consistently think in terms of RR, your trading decisions become more systematic. Even with some losses, your profits can outweigh your losses because each gain is larger than each loss—this is the power of understanding and applying the RR correctly.