What is Risk of Ruin in Trading?
Quick Answer: Risk of ruin measures the probability that a trader loses so much capital they can no longer participate, a value driven by win rate, payoff ratio, and the percentage of equity risked per trade.
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.
Practical Benchmark
Risking 1% per trade with a 50% win rate and 1.5R average reward keeps risk of ruin under 1%. Doubling risk to 2% raises ruin probability exponentially.
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.
Ignoring Ruin Metrics
Many traders focus on returns and neglect survival odds. Without tracking risk of ruin, a short losing streak can wipe out years of progress.
Related Terms
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