Understanding Risk-Reward Ratio

Many people, when entering a trade, often only look for a good entry point but forget that risk management is much more important. The Risk-Reward Ratio is a fundamental concept to understand. It is the proportion between the money we are willing to lose (Risk) and the money we expect to gain (Reward). For example, if we set a Stop Loss at 1 baht and a Take Profit at 2 baht, that means our Risk-Reward Ratio is 1:2. If we enter $ROSE at 11.66 baht and set SL at 11.63 baht (meaning we risk 0.03 baht), to achieve an R:R of 1:2, we should set TP at 11.66 + (0.03 * 2) = 11.72 baht. Having a good R:R in a trade means that even if we only win 50% of all trades, we can still make a profit in the long run.

Having a clear Risk-Reward Ratio in each trade helps us avoid bias when the market is volatile and is also the basis for calculating appropriate Position Sizing. Because if you don't know how much you are risking, how can you know how much money you should put into each trade?