Risk of ruin explained
Founder of TradeStack. Builds the importer and reviews every broker export format by hand.
Risk of ruin is the probability of losing enough to end the account. It rises with risk per trade and falls with positive expectancy. Cutting position size is the fastest way to lower it.
What risk of ruin means
Ruin is the point you can't continue: a blown account, or a prop firm drawdown breached. Risk of ruin estimates how likely a normal run of losses is to get you there.
What drives it
Three things: win rate, average win versus average loss (payoff), and how much of the account you risk per trade. A positive-expectancy strategy can still be ruined if each trade risks too much.
Losing streaks are normal
Even a 50% win rate strategy will see long losing streaks over hundreds of trades. Size so the longest streak you can reasonably expect costs only a fraction of the account or drawdown.
How to lower it
Risk less per trade, stop trading for the day after a set loss, and only scale up after your journal shows positive expectancy across a large sample of trades.
Frequently asked
Is risk of ruin the same as max drawdown?
No. Max drawdown is the largest drop you actually had. Risk of ruin is the probability of a drop large enough to end the account.
What inputs do I need to estimate it?
Your win rate, average win, average loss and risk per trade, all of which a trading journal calculates from your logged trades.
Why does it matter for prop firms?
Evaluation drawdowns are small, so ruin is reached quickly. Lower risk per trade keeps a losing streak inside the limit.
Keep reading
TradeStack is a free trading journal. Drop in a CSV and get win rate, profit factor and expectancy automatically.
Start free