Risk of Ruin Calculator
Simulate probability of account bankruptcy based on edge, win rate, and risk per trade.
Professional trade parameters advise risking at most 1% to 2% of equity per transaction.
How the Calculation Works
Read parameters and compute total exposure: multiply order quantity by contract unit multiplier.
Evaluate terminal return at the selected target price using strict financial mathematical boundary logic.
Deduct upfront capital commitments, taxes, or net debits to produce final net profit or loss realization.
Calculation Formula
Example Calculation
55% win rate, 1.5 payoff ratio, and 2% risk per trade.
With positive mathematical expectancy and conservative 2% risk, probability of ruin is statistically negligible.
Assumptions & Parameters
- Assumes independent, identically distributed trade outcomes with constant win rate and payoff ratio.
Frequently Asked Questions
What is the risk of ruin in trading?
Risk of ruin is the mathematical probability that a trading system will result in total account bankruptcy over time.
How does win rate affect risk of ruin?
Higher win rates significantly reduce risk of ruin, provided average losses do not excessively exceed average wins.
Why can a system with a positive win rate still go bankrupt?
If position sizing is too aggressive (e.g., risking 15% per trade), a string of consecutive losses can wipe out equity.
What role does the payoff ratio play?
A high payoff ratio allows a trading system to remain safe and profitable even with a win rate below 50%.
How does position sizing impact risk of ruin?
Lowering risk per trade (e.g., from 5% to 1%) exponentially decreases statistical risk of ruin.
What edge is needed to eliminate risk of ruin?
A positive mathematical expectancy combined with conservative risk-budget allocation keeps ruin probability near zero.