How important is RR to traders? Understand the Risk Reward Ratio and Win Rate correctly

Trading and investing are not about finding the grassroots or choosing the asset with the highest returns. Instead, they involve identifying the gap between expected profits and potential risks. That is why the Risk Reward Ratio (RR) has become an essential tool that helps traders make informed decisions without relying solely on hope or feelings.

What exactly is the Risk Reward Ratio?

RR (Risk Reward Ratio) is a comparison between the amount of money you might lose (risk) and the amount of profit you can make (return) when trading or investing in a single position. This indicator is not as complicated as it seems; it can tell you whether your investment decision is justified.

Simply put, a higher RR = more attractive investment because it means you could earn more than what you risk.

Why is RR important for traders?

1. Helps distinguish worthwhile trades from those that should be avoided

Imagine you have two trading options:

Option 1: Invest in stock of Company A, expecting a 20% profit, but with a 50% risk of loss.

Option 2: Invest in stock of Company B, expecting a 10% profit, with only a 5% risk of loss.

If you only look at the percentage profit, you might choose Option 1 because 20% is greater than 10%. But when applying RR, you see that Option 2 has an RR of 2.0 (10% ÷ 5%), whereas Option 1 has an RR of only 0.4 (20% ÷ 50%). Therefore, Option 2 is the smarter choice.

2. Acts as a risk management tool (Risk Management)

Professional traders often set a Stop Loss at a certain level to limit losses, using RR to determine where to place it. For example, if you accept a risk of only 50 baht per trade and want at least a 2:1 RR, it means you can expect a profit of 100 baht from that trade.

How to calculate the Risk Reward Ratio

The basic formula for RR is:

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

Breaking down each variable:

• Target Price = the price you expect the stock to reach
• Entry Price = the current price at which you decide to buy
• Stop Loss Price = the lowest price you are willing to accept; if the stock drops below this, you sell

Case Study: Trading BTS stock in real life

Suppose you are looking at BTS (BTS Group Holdings), with a closing price of 7.45 baht. You expect:

• The price to rise to 10.50 baht (target)
• If wrong, you will sell at 4.50 baht (Stop Loss)

Using the RR formula:

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

This result means that for every 1 baht you risk, you could gain 1.03 baht, which is quite reasonable.

What are the different types of risks?

In the investment world, risks are not limited to just one type:

• Liquidity Risk = inability to buy or sell at desired times
• Correlation Risk = multiple assets moving in the same direction, reducing diversification effectiveness
• Currency Risk = stock value decreases due to exchange rate fluctuations
• Interest Rate Risk = changes in interest rates reduce returns
• Inflation Risk = inflation diminishes the real value of money
• Political Risk = political events cause sharp declines in stock prices

What is the appropriate RR to aim for?

Most traders recommend looking for RR ≥ 2 for long-term investments, as this indicates a good balance of risk and reward.

• RR = 1.0 or higher → Acceptable, but profit equals loss
• RR = 1.5 – 2.0 → Good, but not ideal
• RR ≥ 2.0 → Excellent, highly worthwhile

However, an excessively high RR may not be realistic, as it suggests overly ambitious profit targets.

The relationship between RR and Win Rate: a deeper understanding

This is a crucial point many overlook: RR and Win Rate have an inverse relationship. If RR is high, Win Rate tends to be lower, and vice versa.

Because if you aim for trades with high RR, you need to set distant targets and tight stop losses, which reduces the probability of winning.

Numerical example: RR 3:1 with a Win Rate of 25%

Imagine you trade 100 times with an RR of 3:1 and a Win Rate of 25%:

• Wins: 25 × 3 = profit of 75 units
• Losses: 75 × 1 = loss of 75 units
• Net result = 0 (break-even)

This means that with an RR of 3:1, you need at least a 25% Win Rate to break even.

Relationship table: Minimum Win Rate for given RR

A deeper understanding of this relationship is key to choosing a trading strategy aligned with your skill level. If you have a high Win Rate (60-70%), you can accept a lower RR because frequent wins compensate for occasional losses.

Professional analysis: RR in different scenarios

( RR = 1:1 )Return = Risk(

This is akin to a fair bet: you might win half the time and lose half the time, ending up with zero net profit. Not recommended for serious traders because it yields no profit.

) RR = 1.5:1 to 2:1 (Return > Risk in some cases)

This is a safe zone for most traders. With a Win Rate of 40-50%, you can make a profit. Ideal for moderate trading that doesn’t want to take excessive risks.

( RR ≥ 3:1 )Return much greater than risk(

This is the domain of skilled traders with low Win Rates )20-30%### but still profitable due to high RR. It requires strong analytical skills and strict signal filtering systems.

Note that the highest RR does not always mean the best. Sometimes, traders with an 80% Win Rate can be quite profitable even with an RR of only 0.5:1.

Summary: How should you use RR?

RR is a tool, not a law. Use it to assist decision-making, not to dictate your actions. Successful traders often combine RR with other factors such as:

• Technical evidence (Support, Resistance, Trend)
• Fundamental data ###Earnings, Growth, Industry trends(
• External factors )News, Policies###
• Your personal risk tolerance (Mental resilience and risk capacity)

Traders who truly understand the relationship between RR and Win Rate can select strategies suited to their profile and achieve more sustainable profits.

Therefore, the first step is to spend time understanding your trading strategy’s RR, then adjust your Stop Loss and Take Profit to match your desired RR. The next 100 days will be significantly different based on this planning.