📌 What is “Risk of Ruin” in Trading?
In trading, Risk of Ruin refers to the probability of losing enough capital that you can no longer continue trading. In simple terms, it answers the question:
👉 “If I trade this strategy over time, how likely am I to blow up my account?” This is a critical concept for every trader because even a profitable strategy can fail if risk isn’t managed correctly. By calculating your Risk of Ruin, you gain clarity on how sustainable your trading plan is and whether you need to adjust your position sizing, stop losses, or win rate expectations.
How to use Risk of Ruin Calculator
1. Quick summary — what this calculator tells you
The Risk of Ruin calculator generates two key insights for traders:
- Risk of Ruin — the probability your account falls to an unacceptable low (we often define this as near-total loss).
- Peak-to-Valley Drawdown probability — how likely your account is to suffer a drawdown worse than the percentage you’re worried about.
Use this tool to test position sizing, win rate, and reward/risk assumptions before you trade with real money.
2. The inputs — what to enter
Following inputs required for the calculations:
- Win rate (%) — the percentage of trades that are winners (e.g., 55 for 55%).
- Average profit-to-loss ratio (P/L ratio) — the average winning trade size divided by the average losing trade size (e.g., 1.5 means average win is 1.5x the average loss).
- Risk per trade (%) — how much of your current account you risk on each trade, expressed as a percent of the account (e.g., 1 for 1%). This is the single most important variable for ruin probability.
- Number of trades — how many trades to simulate (the higher, the more realistic long-term assessment).
- Max drawdown (%) — a threshold you care about (e.g., 20 for 20%). The calculator reports the chance you’ll exceed this drawdown during the simulated run.
3. Step-by-step: how to use our risk of ruin calculator
- Pick a realistic win rate. Use your backtest or live trading history. If you don’t have history, use conservative estimates (e.g., 40–55% depending on strategy).
- Set your P/L ratio honestly. If your wins are twice the size of losses, use 2.0. If you use fixed take-profit and stop-loss values, compute the mean win / mean loss.
- Choose risk per trade. Start small when in doubt. Common values: 0.5%–2.0% of current account per trade. Smaller risk reduces ruin probability dramatically.
- Choose the number of trades. For a robust view, simulate at least several hundred to several thousand trades.
- Choose a max drawdown % you’ll tolerate. Many traders will choose 20%–30%; and conservative traders opt for 10%–15%.
- Run the calculator. It will run Monte Carlo simulations and return: Risk of Ruin (%) and probability of exceeding your max drawdown.
- Interpret results and adjust. If your ruin probability is higher than you’re comfortable with, reduce risk per trade first. If that hurts returns too much, revisit edge (win rate, P/L ratio) or add diversification.
4. Example
Imagine:
- Win rate: 55%
- P/L ratio: 1.5
- Risk per trade: 1%
- Number of trades: 1000
- Max drawdown threshold: 20%
The calculator will run thousands of trading simulations with those settings and report:
- Risk of Ruin — it will give 0.001%. it is the probability that the account ends up ruined (or below your ruin threshold).
- Probability of exceeding 20% drawdown — how likely you are to see a drop of 20% or worse at any point.
Key insight: With the same win rate and edge, reducing risk per trade from 2% to 1% typically reduces ruin chances by a large margin while only modestly lowering expected long-term growth volatility.
5. How to interpret outputs
- Risk of Ruin = very low (e.g., <1%) — Position sizing is conservative relative to your edge; you can scale slowly.
- Risk of Ruin = moderate (1–20%) — Consider reducing risk per trade or re-testing your edge; plan for longer drawdowns.
- Risk of Ruin = high (>20%) — Stop. Reassess position sizing, edge, and strategy viability.
- High probability of exceeding your chosen drawdown — That means you should be prepared psychologically and financially for that drawdown, or lower risk sizing to keep it acceptable.
6. Practical rules & checklist for traders
- Rule #1: Start with comfortable risk per trade — never risk an amount that would force emotional trading after a drawdown.
- Rule #2: Always validate your win rate and P/L ratio with real data (paper trading or out-of-sample testing).
- Rule #3: Use the calculator as part of risk management, not as a guarantee. It shows probabilities under assumptions.
- Rule #4: Rinse and repeat — re-run the calculator when you change strategy parameters or position-sizing rules.
- Checklist before live trading: backtest → paper trade → estimate win rate and P/L ratio → choose risk per trade → run risk-of-ruin calculator → set limits.
7. Limitations — what the calculator does not model
- Non-stationary edges: If your win rate/P/L changes over time, results may be optimistic or pessimistic.
- Fat tails & skew: The calculator typically assumes IID trades (independent, identically distributed). Real markets can have rare, large events.
- Slippage and commissions: Ensure your P/L ratio already accounts for costs.
- Correlation between trades: If trades are correlated (e.g., several positions move together), ruin probabilities are understated unless you model correlation/diversification.
8. FAQs (quick answers)
Q: What’s the most important input?
A: Risk per trade. Small changes here have the biggest effect on ruin probability.
Q: Should I use fixed dollar risk or % of current account?
A: Use % of current account to scale with account growth/decline (compounding). The calculator assumes percentage-based sizing.
Q: What’s a safe risk per trade?
A: Trail of evidence suggests 0.5%–1% is conservative for many strategies; very aggressive traders use >2% (higher ruin risk).
Q: Can I use the calculator for portfolio strategies?
A: Yes — but you must aggregate expected win rate and P/L across the portfolio, and account for correlation.
9. Common mistakes to know
- Using unrealistically high win rates or P/L ratios (optimism bias).
- Ignoring transaction costs and slippage.
- Forgetting to re-run the calculator after strategy changes.
- Treating the output as a guarantee instead of a probabilistic estimate.