Risk of Ruin Calculator
Assess the probability of losing your entire account based on your trading statistics.
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Quick answer
Risk of ruin is the probability of losing your trading account given your win rate, risk-reward ratio, and risk per trade. A zero or negative edge makes ruin effectively certain; a positive edge combined with small per-trade risk pushes the probability toward zero.
What is the Risk of Ruin Calculator?
What Is a Risk of Ruin Calculator?
The Risk of Ruin Calculator determines the statistical probability of depleting your trading account to a specified level (usually zero or 50%) based on your win rate, risk-reward ratio, and risk per trade. This advanced tool is used by professional traders, prop firms, and quants to evaluate whether a trading system is mathematically sustainable over thousands of trades.
Unlike simple win-rate analysis, Risk of Ruin accounts for the compounding nature of consecutive losses. Even a profitable strategy can blow an account if position sizes are too large or if a losing streak exceeds expectations. This calculator reveals whether your edge is strong enough to survive inevitable drawdowns.
Why Risk of Ruin Matters
- System Validation: A trading strategy isn't viable if Risk of Ruin exceeds 1%—even with a positive expectancy
- Position Sizing: Reveals maximum safe risk per trade to ensure long-term survival
- Prop Firm Evaluations: Funded trader programs use Risk of Ruin to assess whether applicants can pass challenges
- Psychological Preparation: Understanding ruin probability helps traders mentally prepare for inevitable losing streaks
- Strategy Comparison: Compare different systems based on survival probability, not just expected returns
Risk of Ruin Formula
Risk of Ruin = ((1 – Edge) / (1 + Edge)) ^ Capital Units
Where:
- Edge: (Win Rate × Average Win) – (Loss Rate × Average Loss)
- Capital Units: Account Balance ÷ Risk per Trade (how many losses until ruin)
A trader with a $10,000 account risking $200 per trade (2%) has 50 capital units. With a positive edge, the ruin probability decreases exponentially.
How to Use This Calculator
How This Calculator Works
Step-by-Step Guide
- Enter Win Rate: Your strategy's winning percentage based on historical data (minimum 100 trades for accuracy)
- Input Risk-Reward Ratio: Average winner size divided by average loser size (e.g., 1.5 means winners are 50% larger than losers)
- Specify Risk Per Trade: Percentage of account risked on each trade (typically 1-2%)
- Set Ruin Threshold: Account level considered "ruin" (default 0%, but 50% drawdown is also commonly used)
- Calculate: View the probability of reaching ruin over the long term
Interpreting Results
- 0-1% Risk of Ruin: Excellent. Strategy is mathematically sound for long-term trading.
- 1-5% Risk of Ruin: Acceptable for most traders, but consider reducing risk per trade.
- 5-25% Risk of Ruin: Dangerous. High probability of significant drawdown or account loss.
- 25%+ Risk of Ruin: Unacceptable. Strategy will almost certainly fail over time. Do not trade live.
Real-World Example
Real-World Examples
Example 1: Viable Strategy (Low Ruin Risk)
- Win Rate: 55%
- Risk-Reward Ratio: 1.5:1
- Risk Per Trade: 1%
- Capital Units: 100
Calculation:
Edge = (0.55 × 1.5) – (0.45 × 1) = 0.825 – 0.45 = 0.375
Risk of Ruin = ((1 – 0.375) / (1 + 0.375))^100 = (0.45)^100 ≈ 0.00001%
With a strong edge and conservative sizing, this strategy has essentially zero risk of ruin. It can be traded confidently.
Example 2: Marginal Strategy (High Ruin Risk)
- Win Rate: 40%
- Risk-Reward Ratio: 1.5:1
- Risk Per Trade: 5%
- Capital Units: 20
Calculation:
Edge = (0.40 × 1.5) – (0.60 × 1) = 0.60 – 0.60 = 0.00
Risk of Ruin = ((1 – 0) / (1 + 0))^20 = 1^20 = 100%
With zero edge and high risk per trade, account ruin is mathematically guaranteed. This trader must either improve win rate, increase R:R, or reduce risk per trade.
Example 3: Improving a Risky Strategy
Same 40% win rate, 1.5:1 R:R strategy, but reducing risk from 5% to 1%:
Capital Units increase from 20 to 100
Even with zero edge, more capital units provide more "lives" to survive losing streaks, reducing immediate ruin probability (though long-term erosion continues).
When to Use
When to Use This Calculator
- Before Going Live: Validate that your backtested strategy can survive real-market conditions
- After Strategy Modifications: Re-evaluate ruin probability whenever you change win rate, R:R, or position sizing
- Prop Firm Challenges: Determine if your strategy can pass firm challenges without breaching drawdown limits
- Recovering from Drawdown: Recalculate with reduced capital to ensure survival with remaining balance
- System Comparison: Choose between strategies based on survival probability, not just expected returns
- Periodic Audits: Quarterly review of live performance to ensure metrics haven't degraded
Common Mistakes
Common Mistakes to Avoid
- Insufficient Sample Size: Calculating ruin probability from 20-30 trades is meaningless. You need 100+ trades minimum, ideally 500+, for statistically reliable win rate and R:R estimates.
- Ignoring Slippage and Costs: Backtested results often don't include spread, commission, and slippage. Real win rates are typically 2-5% lower than backtests suggest.
- Using Optimistic Metrics: Traders often remember their best trades and forget losers. Use actual trading journal data, not memory.
- Not Recalculating After Drawdown: After a 30% drawdown, your capital units decrease. A 1% risk on $10,000 is 100 units. After dropping to $7,000, the same 1% is only 70 units — higher ruin probability.
- Assuming Static Win Rate: Market conditions change. A strategy that won 60% in trending markets might win only 40% in ranging markets. Use conservative estimates.
Use Together With
Kelly Criterion Calculator
Calculate the mathematically optimal position size based on your win rate and reward-risk ratio.
Position Size Calculator
Calculate the perfect position size for your trades based on your account size, risk tolerance, and stop loss distance.
Compound Interest Calculator
Project your trading account growth over time with the power of compound interest and consistent returns.
Frequently Asked Questions
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