Risk of ruin

Risk of ruin combines three things: how often a strategy wins, how large wins are compared with losses, and how much of the account is risked on each trade. Even a strategy with a positive expectancy can wipe out an account if each trade risks too much, because losing streaks are a normal part of any sequence of trades.

"Ruin" does not have to mean zero. Many traders define it as a drawdown they would not continue past, such as 50%.

Example: losing streaks

Illustrative figures: with a 50% chance of winning each trade, independent of the last one, the chance of 10 losses in a row is 0.5 multiplied by itself 10 times, about 1 in 1,024. Over a few thousand trades, a streak like that becomes more likely than not to appear at some point.

What that streak does depends on the risk per trade:

• Risking 2% of the current balance per trade: 0.98 to the power 10 ≈ 0.817, a drawdown of about 18%.
• Risking 5%: 0.95 to the power 10 ≈ 0.599, a drawdown of about 40%.
• Risking 10%: 0.90 to the power 10 ≈ 0.349, a drawdown of about 65%.

After a 65% drawdown, the account needs to gain about 186% to get back to where it started.

Practical notes

• Formulas assume a stable edge. Textbook risk-of-ruin formulas and simulations assume you know your true win rate and payoff. Real results drift, so estimates are rough.
• Risk per trade is the lever you control. It is the input that changes ruin probability most, and it is the one set by position size.
• Leverage adds a floor. A margin close-out can end the account's trading before a mathematical model would.

Our guide to risk of ruin works through the calculation, and the position size calculator turns a percentage risk into a lot size.