Risk of ruin is the probability that a run of losses reduces your account to a level you can no longer trade from. It is driven by three things - your win rate, your risk-to-reward, and how much you risk per trade - and the last one dominates.
Key takeaways
- Risk of ruin is the probability a losing streak shrinks your account below a level you can trade from.
- Three inputs drive it - win rate, risk-to-reward, and risk per trade - but risk per trade dominates by far.
- A genuine edge can still blow up if the bet size is too large; you can estimate your own odds with the Monte Carlo simulator.
Why position size dominates
A strategy with a real edge still loses several trades in a row from time to time. If each of those losses is large relative to your account, a perfectly normal streak can end you before the edge ever shows up. If each loss is small, the same streak is a shrug. The size of the bet, more than the quality of the bet, decides survival.
The exact numbers depend on your edge, but the shape is universal: ruin risk collapses as risk per trade shrinks. That is the entire case for the one percent rule.
The three inputs
- Risk per trade - the strongest lever by far. Halving it more than halves your ruin odds.
- Win rate - a higher win rate means shorter expected losing streaks.
- Risk-to-reward - bigger winners relative to losers rebuild the account faster after a dip.
You can estimate how long a streak to expect from your win rate in consecutive losses probability, and confirm your true edge with expectancy.
Important: positive expectancy is necessary but not sufficient. A profitable edge only pays off if your position sizing keeps you alive long enough to reach the long run. Ruin is what happens when you are right about the strategy and wrong about the bet size.
Stress-test your own ruin odds
You do not have to trust a formula in the abstract. Run a large sample of trades through a backtesting simulator, look at the deepest drawdown the strategy produced, and ask whether you could have survived it at your chosen risk. If a normal historical streak would have ruined you, the fix is simple and immediate: risk less per trade.
If you would rather look the numbers up than derive them, the risk of ruin table publishes the probability of a 50% drawdown for twenty strategy profiles across six position sizes, from 20,000 Monte Carlo runs per cell.
Risk of ruin FAQ
What is risk of ruin in trading?
The probability that a run of losses reduces your account to a point you can no longer trade. It depends on win rate, risk-to-reward, and above all risk per trade.
How do you reduce risk of ruin?
Risk less per trade - the strongest lever by far. Improving win rate and average winner size helps, but position size has the largest effect.
Can a profitable strategy still go to ruin?
Yes. Risking too much per trade lets a normal streak end the account before the edge plays out. Positive expectancy only helps if sizing keeps you in the game.
What is an acceptable risk of ruin?
Most pros keep the odds of a catastrophic wipe well under 1% over the long run - usually by risking 1% or less per trade with a positive edge. There's no single threshold, but closer to zero is always better; ruin is the one outcome you can't recover from.