Risk of Ruin Calculator
Risk of ruin is the probability of losing a set percentage of your trading account. Calculate yours based on your win rate, risk per trade, and payoff ratio.
What Is Risk of Ruin?
Risk of ruin measures the probability that your account hits a specified drawdown level before recovering. The math is asymmetric: a 50% drawdown requires a 100% gain to break even. A 75% drawdown requires a 300% gain. Losses compound faster than gains.
Use proper position sizing to keep your risk of ruin low. The formula depends on your edge (win rate times reward ratio minus loss rate), your risk per trade, and the drawdown threshold you define as "ruin."
How Risk Per Trade Affects Survival
At 1% risk per trade, 10 consecutive losses produce a 9.6% drawdown. Painful but survivable. At 5% risk per trade, 10 consecutive losses produce a 40.1% drawdown. Account-threatening.
The difference between 1% and 2% risk seems small on a single trade. Over hundreds of trades, the compounding effect is dramatic. A strategy that survives at 1% risk may blow up at 3%.
The Kelly criterion finds the risk level that maximizes growth without excessive ruin probability. Most traders are better served by staying well below their Kelly-optimal level. Account survival matters more than profits in the first year.
Frequently Asked Questions
Frequently Asked Questions
Risk of ruin is the probability that your trading account will hit a specified drawdown level. A trader risking 2% per trade with a 50% win rate and 1:2 reward ratio has approximately a 1.5% probability of reaching a 50% drawdown. The calculation depends on your win rate, risk per trade, and reward-to-risk ratio.
Professional traders target a risk of ruin below 1%. Active retail traders should aim for below 5%. If your risk of ruin exceeds 10%, your position sizing is too aggressive for your edge. Reduce your risk per trade or improve your win rate and reward ratio.
Three levers control your risk of ruin: risk per trade, win rate, and reward-to-risk ratio. Lowering your risk per trade from 3% to 1% has the largest immediate effect. Improving your win rate or R:R also reduces ruin probability. Most traders get the fastest results from cutting position size.
The threshold varies by trader. 50% is a common benchmark because recovering from a 50% drawdown requires a 100% gain. Some traders set ruin at 25% or 30%, where the recovery is still feasible but the psychological damage is severe. Institutional traders often use 10-20% as their maximum drawdown limit.