What is risk of ruin in trading?

Risk of ruin is the statistical probability that a trader will lose a specified percentage of their account (typically 50% or more) given their win rate, risk per trade, and risk:reward ratio. A 5% risk of ruin means there is a 5% chance your account will be cut in half based on your current trading parameters.

What is an acceptable risk of ruin?

Professional traders aim for a risk of ruin below 1%. Below 5% is considered acceptable for most serious traders. Above 15% is risky, and above 50% means your account is more likely to fail than succeed. Reducing risk per trade from 5% to 1% can reduce your risk of ruin from dangerous to near-zero.

How does risk per trade affect risk of ruin?

Risk per trade is the single most powerful variable. Doubling your risk per trade can increase your risk of ruin exponentially. For example, a strategy with 2% risk might have a 0.5% ruin probability, but the same strategy at 5% risk could have a 25% ruin probability. This is why professionals use 1-2% maximum.

Can a high win rate save me from ruin?

Not if your risk per trade is too high. A 70% win rate with 1:1 R:R and 10% risk per trade still has a significant risk of ruin because losing streaks of 5-7 trades are statistically inevitable. Even the best strategies hit losing streaks — position sizing is what determines survival.

What is Monte Carlo simulation in trading?

Monte Carlo simulation runs thousands of random trading scenarios using your strategy's parameters. Each simulation randomly determines wins and losses based on your win rate, then tracks the equity curve. By running 10,000+ simulations, it reveals the range of possible outcomes and the probability of ruin.

What is the difference between risk of ruin and maximum drawdown?

Maximum drawdown measures the largest peak-to-trough decline in a single equity curve. Risk of ruin measures the probability of hitting a specific drawdown threshold across all possible sequences of trades. A 30% max drawdown in backtesting doesn't mean ruin probability is 30%.

How do I reduce my risk of ruin?

Three ways: (1) Reduce risk per trade — the most powerful lever. Going from 5% to 1% can drop ruin probability from 50% to near 0%. (2) Improve your edge — higher win rate or better R:R ratio. (3) Lower your ruin threshold.

What is trading expectancy?

Expectancy is the average amount you expect to win (or lose) per trade, expressed in R-multiples. Formula: (Win Rate × Average Win) - (Loss Rate × Average Loss). Positive expectancy means the strategy is profitable over time.

Why does the Monte Carlo result differ from the mathematical formula?

The mathematical formula assumes infinite trades and uses simplifying assumptions. Monte Carlo simulation uses a finite number of trades and accounts for the random sequencing of wins and losses. For short trade horizons (under 200 trades), Monte Carlo is more realistic.

What is the Kelly Criterion and how does it relate to risk of ruin?

The Kelly Criterion calculates the optimal bet size to maximize long-term growth. Full Kelly eliminates risk of ruin in theory but produces massive drawdowns in practice. Most traders use half-Kelly or quarter-Kelly.

How many trades do I need for the simulation to be meaningful?

At least 100 trades for basic insights, 200-500 for reliable results. The simulation runs 10,000 iterations of your specified trade count.

Is a 50% win rate with 1:2 R:R profitable?

Yes. Expectancy = (0.50 × 2) - (0.50 × 1) = +0.50R per trade. You lose half your trades but win twice as much when you win. With 1% risk per trade, this produces approximately 0.5% account growth per trade with very low risk of ruin.

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Forex Tools

In this section, you’ll find a collection of useful Forex trading tools specially made for forex traders. Each tool is designed to save time, support better analysis, and make trading more efficient. Whether you need calculators, converters, or strategy helpers, this section will provide everything you need to manage your trades with ease and accuracy.

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