Estimate the probability of losing your trading account based on your edge and risk management.
Risk of ruin is the probability that you will lose a significant portion of your trading capital — enough to effectively end your ability to trade. It depends on three key factors: your win rate, your reward-to-risk ratio (R), and how much you risk per trade.
A trader with a 60% win rate and 2R average can still blow their account if they risk 10% per trade. Risk of ruin quantifies this danger as a percentage probability.
Even profitable trading systems can fail with poor risk management. A high expectancy means nothing if a single streak of losses wipes out your capital before the edge has time to play out. Risk of ruin is the bridge between having an edge and actually surviving long enough to profit from it.
Lowering your risk per trade is the single most effective way to reduce your risk of ruin. Going from 5% risk to 1% risk per trade can take your ruin probability from near-certain to near-zero — even with the exact same win rate and R.
Yes. If your risk per trade is too high, a normal losing streak can wipe you out before your edge has time to recover. A positive expectancy only works over a large number of trades — you need to survive long enough to see it.
Most professional traders risk between 0.5% and 2% of their account per trade. At 1% risk, even a 10-trade losing streak only costs 10% of your account. At 5% risk, that same streak costs 50%.
No. This is a statistical estimate based on your inputs. Real trading involves variable win rates, changing market conditions, and psychological factors that this model doesn't capture. Use it as a planning tool.
This depends on whether you are trading personal capital or with a prop firm. When trading with a prop firm, you are limited by daily and max drawdown rules — these would be your ruin threshold. You can input either your daily or max drawdown as the ruin threshold. For traders using their own capital, this number depends entirely on their personal risk tolerance and how much of a drawdown they can absorb financially and psychologically before they can no longer trade effectively.
Because risk of ruin is exponential, not linear. Halving your risk per trade doesn't just halve your risk of ruin — it can reduce it by orders of magnitude. This is the mathematical reason why position sizing is the most important part of trading.