On this page (6 questions)
What is risk of ruin in trading?
Risk of ruin is the chance that a run of losses takes your account down to a level you can’t or won’t trade on from, such as a 50% loss or an account’s maximum loss rule. It depends on your win rate, the size of your wins against your losses, and how much you risk on each trade.
A positive expectancy doesn’t make it zero. Even a strategy that makes money on average can hit a long losing run before the average shows, and the more you risk per trade, the shorter the run that does the damage.
How is risk of ruin calculated?
This calculator adds up the chance of every order of wins and losses over the number of trades you enter, and counts the orders that reach the ruin level. That gives an exact answer for those trades, where many calculators run a random simulation or use a formula that only fits wins and losses of the same size.
Example: a 45% win rate, an average win 1.5 times the average loss, 1% of the current balance risked per trade, and a 50% loss as the ruin level.
Worked example
- Expectancy45% × 1.5R − 55% × 1R = +0.125 rounded to +0.13R
- Losses in a row to reach 50%ln(1 − 50%) ÷ ln(1 − 1%) is about 68.9675 rounded to 69 losses
It takes 69 losses in a row to lose half the account, and the chance of a run bad enough within 500 trades is under 0.1%. The calculator works through every trade in turn: each one either wins or loses, and any path that reaches the ruin level is counted once, at the trade where it got there.
How does risk per trade change the risk of ruin?
Risk per trade matters more than anything else you control, because it sets how many losses in a row reach the ruin level. With a 45% win rate and wins 1.5 times the size of losses, the chance of losing 50% within 500 trades is 0.5% at 2% risk per trade and 18.0% at 5%.
| Risk per trade | Losses in a row to lose 50% | Chance within 500 trades |
|---|---|---|
| 0.5% | 139 | under 0.1% |
| 1% | 69 | under 0.1% |
| 2% | 35 | 0.5% |
| 3% | 23 | 3.8% |
| 5% | 14 | 18.0% |
The win rate and the size of the wins are the same on every row. Only the risk per trade changes, and the chance goes from negligible to almost one in five. The position size calculator turns a risk % into a lot size for each trade.
Should risk be a % of the current or the starting balance?
Risking a % of your current balance makes each loss smaller as the account falls, so it takes more losses in a row to reach the ruin level. Risking a % of the starting balance keeps every loss the same size: at 5% risk, a 50% loss takes 14 losses in a row the first way and 10 the second.
The chance can still end up close, because a % of a smaller balance also makes each win smaller. In the example above at 5% risk, it’s 18.0% one way and 18.4% the other. With a % of the current balance, a 100% loss can never be reached, so set the ruin level below 100%.
Where do the win rate and average win come from?
From your own closed trades: win rate is winning trades ÷ closed trades, and the ratio is your average win ÷ your average loss. The Tradijourney journal’s Stats screen shows all three, worked out from the trades you log.
A handful of trades gives a rough estimate of both. See how win rate and expectancy are calculated, and why a small sample can mislead.
What does the risk of ruin calculation leave out?
It assumes every trade is independent and that every win and every loss is the average size. Real trading has streaks, changing conditions and costs, so treat the answer as a guide to how much risk per trade your results can carry, not a forecast.
It also measures ruin from the starting balance, not from a later peak. A trailing drawdown rule, which follows the balance up, is reached sooner than the same % from the start. See how max drawdown is measured.