🛡️ Risk & Money·advanced

Risk of Ruin

Also called: ruin probability

The mathematical probability that your account will be wiped out before your strategy's edge has time to play out — the closer to zero, the better.

Risk of ruin is the probability that your account will hit zero (or some "ruin" threshold like -50%) before your strategy's edge can play out. It depends on three things: win rate, average reward-to-risk, and risk per trade. Lower risk per trade = lower risk of ruin. Higher edge = lower risk of ruin. The insight is sobering. Even a winning strategy can blow up if you size too big. A 55% win rate with 1.5R wins and 5% risk per trade has about a 5% risk of ruin — meaning 1 in 20 traders following the same strategy goes bust. At 1% risk per trade, the same strategy's risk of ruin drops to nearly zero. Risk of ruin is the mathematical reason why position sizing matters more than entry timing. Get sizing wrong and even great entries can't save you. Get sizing right and even mediocre entries compound into wealth.

Real trade example

The 1998 LTCM blowup was a textbook risk-of-ruin failure — Nobel laureates running a strategy with positive expectancy but catastrophically high leverage. The edge didn't matter once the position sizing failed.

Related terms

Kelly Criterion

advanced

A mathematical formula that calculates the optimal bet size based on win rate and reward-to-risk — used to maximize long-term growth.

Drawdown

intermediate

The peak-to-trough drop in your account equity — a measure of how bad your worst losing streak got.

Expectancy

advanced

The average dollar (or R) amount you can expect to make per trade over many trades — the math behind whether a strategy works.

Position Sizing

beginner

The math that tells you how many lots to trade based on your account, stop distance, and risk tolerance.

Risk Per Trade

beginner

The amount of money or percentage of account equity you put at risk on a single trade — usually 1-2% for serious traders.

R-Multiple

intermediate

A unit that measures profit or loss in multiples of the initial risk taken on a trade — normalizes performance across different position sizes.

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