Even a profitable strategy can hit a long losing streak. Risk of ruin estimates how likely that is to happen before the edge plays out. It rises sharply with risk per trade and falls as expectancy improves. Simple cases have formulas; most traders estimate it with Monte Carlo simulations that replay thousands of random trade sequences.
Example
A strategy wins 45% of trades at 2R and loses 1R. Risking 1% per trade, the chance of a 50% drawdown is very small. Risking 5% per trade, the same strategy has a real chance of halving the account at some point, because a streak of 10 losses, which this win rate will produce now and then, costs about 40% at that size.
Why it matters
Risk of ruin shows why position size matters more than entries for survival. Two traders with the same strategy can end up in very different places depending only on how much they risk per trade.
Common mistake
Thinking a positive expectancy makes ruin impossible. With too much risk per trade, a normal losing streak can end the account, or break your discipline, before the edge has time to show.
Put it into practice
FAQ
- What is an acceptable risk of ruin?
- As close to zero as you can get while still growing. Most professionals size so that ruin would require a losing streak far beyond anything in their history.
- Does risk of ruin assume trades are independent?
- Most models do. Real trades cluster, for example during a bad market regime, so treat the model's result as a lower bound.
- How do I lower my risk of ruin?
- Risk less per trade, improve expectancy and add loss limits that stop trading after a set drawdown.