Risk of Ruin Calculator: How to Know If Your Strategy Will Blow Up
Risk of ruin measures the probability of losing a set percentage of your trading account. Learn the formula, how position sizing changes the math, and calculate your own risk of ruin.
A strategy with a 55% win rate and a 2:1 reward-to-risk ratio sounds profitable. Run the numbers over 1,000 trades and the expected value is clearly positive. But expected value assumes infinite capital and infinite time. Real accounts have neither.
Risk of ruin is the probability that a sequence of losses will draw your account down to a level where you can no longer trade effectively - or at all. It's the bridge between theoretical edge and practical survival, and most traders never calculate it.
What Is Risk of Ruin?
Risk of ruin is the statistical probability that your account balance will decline to a predefined threshold (typically 50% or total wipeout) before recovering. It accounts for the randomness of trade outcomes, the size of your edge, and - critically - how much you risk per trade.
A strategy can have positive expected value and still have a dangerously high risk of ruin. This happens when:
- Position size is too large relative to the edge
- Win rate is moderate (50-60%) with small reward-to-risk, creating long losing streaks
- The ruin threshold is too generous - a 50% drawdown feels survivable on paper but destroys psychology and compounds against you
The concept applies to every style of trading - scalping, swing trading, and long-term position trading. What changes is the frequency of trades and the time horizon over which ruin can occur.
The Risk of Ruin Formula
The analytical formula for risk of ruin under fixed fractional sizing is:
R = ((1 - edge) / (1 + edge)) ^ units
Where:
- edge = (win rate x reward-to-risk ratio) - (1 - win rate). This is your expected value per dollar risked.
- units = account size / dollar risk per trade. This is how many consecutive losses your account can absorb.
- R = probability of ruin (0 to 1)
For example, a strategy with a 55% win rate, 1.5:1 reward-to-risk, and 2% risk per trade:
- Edge = (0.55 x 1.5) - 0.45 = 0.375
- Units = 1 / 0.02 = 50 risk units
- R = ((1 - 0.375) / (1 + 0.375)) ^ 50 = (0.4545) ^ 50 = effectively 0%
Now change the risk to 10% per trade:
- Units = 1 / 0.10 = 10 risk units
- R = (0.4545) ^ 10 = 0.034% - still low, but 34x higher than before
The relationship between position size and ruin probability is exponential, not linear. Doubling your risk per trade doesn't double your risk of ruin - it can increase it by orders of magnitude.
Why Most Traders Ignore It
Risk of ruin doesn't appear in backtesting dashboards by default. Most platforms show you net profit, win rate, profit factor, and max drawdown. None of these tell you the probability of a drawdown exceeding your tolerance.
A backtest showing a 15% max drawdown over 2 years might feel safe. But that 15% was the worst case in that specific sequence of trades. Shuffle the same trades into a different order, and the drawdown could be 30%, 40%, or account-ending. That's exactly what Monte Carlo simulation reveals - the distribution of outcomes, not just the single historical path.
When Risk of Ruin Matters Most
Prop Firm Challenges
Prop firms typically have strict drawdown limits - 5% daily, 10% total. Even a solid strategy can fail the challenge if the position sizing doesn't account for the probability of hitting those limits within the evaluation period. Calculate your risk of ruin with the prop firm's drawdown threshold as the "ruin" level before you start.
Small Account Growth
Traders with small accounts ($500-$5,000) are tempted to risk 5-10% per trade to grow quickly. At those levels, a 5-trade losing streak (completely normal for a 55% win rate strategy) wipes 25-50% of the account. The math works against recovery: after a 50% loss, you need a 100% gain just to break even.
Strategy Transitions
Switching from paper trading to live, or from one strategy to another, introduces a period where your actual win rate hasn't been established. During this phase, sizing conservatively based on a pessimistic risk-of-ruin estimate protects you while you gather real performance data.
How to Use a Risk of Ruin Calculator
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Enter your strategy parameters: win rate, reward-to-risk ratio, risk per trade, and ruin threshold (the drawdown level you'd consider account failure).
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Compare the analytical and Monte Carlo results. The analytical formula assumes independent trades and fixed fractional sizing. Monte Carlo simulation runs thousands of randomized sequences to give you a distribution. If the two diverge significantly, your strategy may have dependencies (winning/losing streaks) that the formula doesn't capture.
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Use the position size comparison. Most calculators (including ours) show how ruin probability changes across different risk levels. Find the maximum position size that keeps your risk of ruin below 1%.
The golden rule: if your risk of ruin is above 1%, reduce your position size until it isn't. No edge justifies a meaningful probability of blowing your account.
Position Size and Risk of Ruin: The Real Relationship
Here's what the math actually looks like for a 55% win rate, 1.5:1 R:R strategy:
| Risk per Trade | Risk Units | Risk of Ruin |
|---|---|---|
| 1% | 100 | ~0% |
| 2% | 50 | ~0% |
| 3% | 33 | ~0% |
| 5% | 20 | ~0.01% |
| 10% | 10 | ~0.03% |
| 20% | 5 | ~1.8% |
| 33% | 3 | ~9.4% |
Notice the jump. From 1-10% risk, the ruin probability is negligible. At 20%, it becomes real. At 33%, you have nearly a 1-in-10 chance of blowing your account. The exponential relationship means there's a cliff - and most traders are closer to it than they think.
Now consider a weaker strategy (50% win rate, 1.2:1 R:R):
| Risk per Trade | Risk Units | Risk of Ruin |
|---|---|---|
| 1% | 100 | ~0.1% |
| 2% | 50 | ~3% |
| 5% | 20 | ~25% |
| 10% | 10 | ~50% |
A 50/50 strategy with a slight edge has meaningful ruin risk even at 2% per trade. This is why risk management isn't optional - it's what separates a strategy that works from a strategy that kills accounts.
Common Mistakes
Assuming win rate is fixed. Your backtested 58% win rate might be 48% live due to slippage, emotional exits, and market regime changes. Always calculate risk of ruin with a pessimistic estimate - subtract 5-10% from your backtested win rate.
Ignoring correlated losses. The analytical formula assumes each trade is independent. In practice, if you trade correlated pairs or a single market, losing streaks cluster. Use Monte Carlo simulation for a more realistic estimate.
Optimizing for growth instead of survival. The Kelly Criterion tells you the optimal bet size for maximum growth. Full Kelly sizing has a 0% risk of ruin only in theory (infinite trades, perfect edge estimates). In practice, half-Kelly or quarter-Kelly is standard precisely because it prioritizes survival over theoretical growth.
Not recalculating after a drawdown. If you're down 20% and still risking the same dollar amount, your effective risk percentage has increased. Fixed fractional sizing (risking a percentage, not a dollar amount) automatically adjusts, but many traders use fixed dollar risk without realizing this.
Risk of Ruin FAQ
What is risk of ruin in trading?
Risk of ruin is the probability that a trading account will lose a specified percentage of its balance before recovering. It depends on three factors: win rate, reward-to-risk ratio, and position size. A strategy can have a positive expected value and still carry a meaningful risk of ruin if position sizing is too aggressive relative to the edge.
What is a good risk of ruin percentage?
Below 1% is the standard target for professional traders. Ideally, risk of ruin should be as close to 0% as possible. Anything above 5% means you have a realistic chance of blowing your account if you trade long enough. Most prop firms implicitly require near-zero risk of ruin by imposing strict drawdown limits.
How does position size affect risk of ruin?
Exponentially. Doubling your risk per trade doesn't double your risk of ruin - it can increase it by 10x or more depending on your edge. For a strategy with a 55% win rate and 1.5:1 R:R, going from 2% to 10% risk per trade increases ruin probability from near zero to measurable. Going from 10% to 20% increases it dramatically. The position size calculator helps you find the right level.
How do I calculate risk of ruin?
Use the analytical formula: R = ((1 - edge) / (1 + edge)) ^ units, where edge is your expected value per dollar risked and units is the number of risk units in your account. For a more realistic estimate, use a Monte Carlo simulation that randomizes trade sequences to reveal the full distribution of drawdown outcomes. You can calculate both instantly with our Risk of Ruin Calculator.
Key Takeaways
- Risk of ruin measures the probability of your account hitting a terminal drawdown - not just the average outcome
- The formula depends on win rate, reward-to-risk ratio, and position size, with position size having the most dramatic impact
- The relationship between position size and ruin is exponential: there's a cliff where small increases in risk create massive increases in ruin probability
- Target below 1% risk of ruin. If you're above that, reduce position size - no edge justifies a meaningful chance of blowing up
- Always use pessimistic estimates (lower win rate, fewer risk units) to account for live trading degradation
- Monte Carlo simulation gives a more realistic picture than the analytical formula alone, especially for strategies with correlated trades
- Calculate your risk of ruin before trading live, before starting a prop firm challenge, and after any significant strategy change
Use the GrandAlgo Risk of Ruin Calculator to run both the analytical formula and Monte Carlo simulation on your strategy parameters instantly.