Risk of Ruin: The Number Most Traders Never Calculate
Every trader accepts that losing trades happen. What most traders never ask is: given my strategy's win rate, reward:risk ratio, and position size, what is the mathematical probability that I eventually lose everything? This number has a name. It is called risk of ruin. And for a surprisingly large number of retail trading strategies, it is not zero.
Each faint trail is one simulated future for this strategy. The bold line is the median — half of runs finished above it, half below. The shaded band spans the lucky 10th to unlucky 90th percentile, so an outcome inside the band was reasonable to expect; outside, less so.
- ✓ Risk of ruin is the mathematical probability your account reaches a defined loss threshold
- ✓ Even profitable strategies carry non-zero risk of ruin at high position sizes
- ✓ Reducing risk per trade has a dramatically larger effect on survival than improving win rate
- ✓ A risk of ruin above 5% is a serious warning — above 10% is unacceptable for live trading
- ✓ Use the Risk of Ruin Calculator to find your exact probability before going live
Every trader accepts that losing trades happen. What most traders never ask is: given my strategy's win rate, reward:risk ratio, and position size, what is the mathematical probability that I eventually lose everything? This number has a name. It is called risk of ruin. And for a surprisingly large number of retail trading strategies, it is not zero.
What risk of ruin measures
Risk of ruin (RoR) is the probability that your account reaches a defined threshold — typically a 50% drawdown or total account loss — before reaching a defined profit target, given an infinite number of trades. It is not a prediction. It is a statement of mathematical probability. A 15% risk of ruin means: in a room of 100 traders with identical strategies, 15 of them will blow up purely from the mathematics of their position sizing, even with a genuine edge.
The formula
Where: Edge = (Win Rate × Reward:Risk) − Loss Rate, and N = number of risk units to ruin (account size ÷ risk per trade).
Example: 55% win rate, 1.5:1 R:R, risking 2% per trade, ruin = 50% loss:
Edge = (0.55 × 1.5) − 0.45 = 0.375
N = $5,000 ÷ $200 = 25 units to ruin
RoR = (0.625 / 1.375) ^ 25 ≈ 0.3% — acceptable
Increase risk to 10% per trade (N = 5): RoR = (0.4545) ^ 5 ≈ 1.8%. Still seems low — but consider this is the probability per trading career, and at 10% risk, just 5 consecutive losses creates a 50% drawdown at worst-possible timing.
What actually drives risk of ruin
Risk per trade (biggest lever): halving risk per trade reduces ruin probability more than doubling win rate would.
Edge (win rate × R:R): a larger edge reduces ruin, but the effect is nonlinear.
Ruin threshold: defining ruin as 25% drawdown gives a higher RoR than 50% drawdown.
The warning threshold
RoR below 1%: excellent. Trade it live.
RoR 1–5%: acceptable for experienced traders with strict discipline.
RoR 5–10%: warning zone. Reduce position size before going live.
RoR above 10%: do not trade this live. The math works against your survival.
→ Use the Risk of Ruin Calculator
The streak problem
At a 45% loss rate, the probability of 10 consecutive losing trades is (0.45)^10 = 0.034%, tiny. But across 2,000 trades, the probability of hitting at least one 10-trade losing streak is approximately 50%. At 1% risk per trade, 10 consecutive losses = 9.6% drawdown. At 5% risk, the same streak = 40% drawdown. Same strategy, same losing streak, vastly different survival outcomes.
FAQ
Is risk of ruin the same as probability of drawdown?
Related but not identical. Risk of ruin measures the probability of reaching a specific loss level before a specific profit target. Maximum drawdown probability measures the expected worst peak-to-trough loss over a specific number of trades. Both are worth calculating.
Can I have a positive expectancy strategy with high risk of ruin?
Yes. A strategy with +0.2R expectancy and 5% risk per trade will eventually be profitable in expectation, but carries meaningful probability of large drawdowns along the way. Positive expectancy does not protect you from variance at large position sizes.
Should I recalculate risk of ruin as my account grows?
If you use fixed fractional sizing (% of current balance), your N stays constant as your account grows, so risk of ruin stays constant. If you use fixed dollar sizing, N increases as your account grows, so ruin probability decreases over time.