Risk of Ruin
Risk of ruin should be below 1% to ensure long-term survival.
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The Formula
Risk of Ruin = ((1 - Edge) / (1 + Edge))^(Capital Units) Edge is your win rate minus loss rate. Capital units is how many risk units your account holds. The result is the probability of losing your entire account before it grows.
Benchmark Ranges
| Level | Range | What It Means |
|---|---|---|
| Excellent | Below 0.1% | Near-zero chance of account destruction |
| Good | 0.1% - 1% | Very low risk with proper position sizing |
| Average | 1% - 5% | Elevated risk; position size may be too large |
| Poor | Above 5% | Unacceptable; account destruction is a real possibility |
How to Track
Calculate your edge from your trading journal (win rate minus loss rate, adjusted for payoff ratio).
Determine how many risk units your account holds (account size divided by risk per trade).
Use the risk of ruin formula or a Monte Carlo simulation to estimate your probability.
Recalculate whenever you change position sizing or when your edge metrics shift.
How to Improve
Reduce risk per trade to 1-2% of account to increase your capital units dramatically.
Increase your edge by being more selective about trade setups.
Maintain a larger account balance relative to risk per trade.
Avoid increasing position size after losses, which compounds risk of ruin.
Why Risk of Ruin Matters
Risk of ruin answers the existential question in trading: what is the probability that I lose everything? Every other metric is irrelevant if you go broke before your edge plays out.
Even profitable strategies can lead to ruin if position sizing is too aggressive. A strategy with a 60% win rate and 1:1 payoff ratio is profitable in expectation, but risking 25% per trade gives you roughly a 40% chance of losing your entire account before doubling it.
Understanding the Concept
Risk of ruin is a probability, expressed as a percentage. It represents the likelihood that a sequence of losses will deplete your account to zero (or to a point where you can no longer trade) before your account grows to a target level.
The two key inputs are your edge (how much you expect to make per trade on average) and your capital units (how many risk units your account contains).
The Position Sizing Connection
Risk of ruin is almost entirely controlled by position sizing:
- 10% risk per trade: Even with a strong edge, risk of ruin can be 20-50%
- 5% risk per trade: Risk of ruin drops to 5-15% for moderately strong edges
- 2% risk per trade: Risk of ruin typically falls below 1%
- 1% risk per trade: Risk of ruin becomes negligible for any strategy with positive expectancy
This is why the 1-2% risk rule is universal among professional traders. It is not about being conservative — it is about mathematical survival.
Monte Carlo Simulation
The basic risk of ruin formula assumes constant edge and equal bet sizes. Real trading is more complex. Monte Carlo simulations provide a better estimate by running thousands of random trade sequences using your actual journal data.
These simulations account for varying trade sizes, streaks, and changing market conditions. They produce a distribution of outcomes that gives you a much clearer picture of your true risk.
Practical Application
Use risk of ruin calculations to set your maximum risk per trade. Start with your actual trading statistics from your journal, plug them into the formula or a Monte Carlo simulation, and find the maximum position size that keeps risk of ruin below 1%.
JournalPlus provides this analysis automatically, running Monte Carlo simulations on your trade history and showing you the probability distribution of outcomes at your current position sizing.
Common Mistakes
Ignoring risk of ruin entirely and focusing only on returns, which leads to overleveraging.
Calculating risk of ruin based on optimistic edge estimates rather than actual journal data.
Assuming that a profitable strategy cannot lead to ruin — it can, with excessive position sizing.
Frequently Asked Questions
What is an acceptable risk of ruin?
Below 1% is the standard target. Professional traders aim for below 0.1%. If your risk of ruin exceeds 5%, you are taking too much risk per trade.
How does position size affect risk of ruin?
Position size is the primary lever. Risking 1% per trade with a modest edge might give you a 0.01% risk of ruin. Risking 10% per trade with the same edge could push it above 50%.
Can risk of ruin be zero?
Practically no, but it can be made negligibly small. With a 55% win rate, 1:1 payoff ratio, and 1% risk per trade, risk of ruin is approximately 0.0001%.
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