What is Risk of Ruin in Trading?

Understanding Risk of Ruin

Risk of ruin measures the probability that a trader will lose so much capital that they can no longer trade. It depends on win rate, average reward-to-risk, and percentage of equity risked per trade. Keeping risk of ruin near zero safeguards your ability to survive inevitable losing streaks.

Key Inputs

Combine your win rate and risk/reward ratio to calculate expectancy. Then model how many consecutive losses your position sizing allows before your account falls below the threshold you set (e.g., 50% drawdown). Lowering risk per trade has the largest impact on keeping ruin probability minimal.

Actionable Steps

Recalculate risk of ruin whenever you tweak strategy rules or encounter a significant drawdown. If ruin probability climbs, cut risk immediately, review trading plans, and rebuild confidence with smaller size.

Simple Formula Insight

A rough approximation shows ruin rises non‑linearly with risk per trade. Halving risk often cuts ruin odds by far more than half. Favor 0.5–1.0% risk until live results prove your edge. Diversify across uncorrelated setups to reduce streak risk.

Advanced Guidance

Build a repeatable, rules‑based process so decisions are consistent across sessions and instruments. Start from context (higher‑timeframe structure, positioning, macro tone), then define precise triggers and invalidation on execution charts. Track spread and depth so your order type matches conditions. Pre‑compute scenarios (breakout, fakeout, mean‑revert) and map actions for each to reduce hesitation.

Execution Framework

• Plan entries at levels with confluence (structure, momentum, time‑of‑day).
• Place stops beyond the logical invalidation, not arbitrary distances.
• Target at least 2–3R; scale out methodically and trail remainder.
• Avoid thin liquidity windows unless the setup explicitly requires it.
• Record slippage and spreads; poor fills can erase edge.

Review Loop

• Journal setups by session and pair to learn where they excel.
• Tag trades by catalyst (news, trend continuation, range breakout).
• Recalculate expectancy monthly; prune underperforming variants.

Risk Controls

Keep daily loss limits, reduce size after consecutive losses, and pause during regime shifts. Survival enables compounding; treat discipline and execution quality as part of your edge.