Risk of Ruin
The statistical probability of losing a predetermined percentage of your account before reaching your profit target
Risk of ruin measures the probability that a trader will lose a critical portion of their account (or all of it) before their edge produces sufficient returns. It is calculated using Monte Carlo simulations that run a trading system through thousands of randomized trade sequences with the same win rate and reward-to-risk ratio. The key insight: a profitable system with too much risk per trade can have a high probability of ruin because variance can destroy the account before expectancy saves it. At 0.5% risk per trade with a 30% win rate and 5R average, risk of ruin is approximately 0.1%. At 2% risk with identical parameters, it jumps to 23%. Position sizing is the dominant variable — more impactful than win rate or reward-to-risk in determining survival.
✓How to Recognize
- •Monte Carlo simulation: run the same system parameters through thousands of random sequences
- •At 0.5% risk: ~0.1% ruin probability, max drawdown ~3.5%, average +50% over 100 trades
- •At 1% risk: ~3% ruin probability, max drawdown ~7%
- •At 2% risk: ~23% ruin probability — nearly 1 in 4 chance of blowing the account
⚡How to Avoid
- →Assuming a positive expectancy system cannot fail (variance can kill before edge pays)
- →Risking more than 1% per trade — ruin probability increases exponentially above this level
- →Ignoring sequence risk: 10 consecutive losses at 2% = 18.3% drawdown
- →Not running simulations with your actual system parameters before trading live