Trading term

What is Risk of ruin?

Risk of ruin is the probability that an ordinary run of losses wipes out your account before your edge has a chance to play out. It depends far more on position size than on how good the strategy is.

Even a genuinely profitable system loses many trades in a row eventually — a 55% edge will produce a run of ten losses often enough to matter. Risk of ruin asks the survival question: given that streaks happen, what is the probability of losing everything first?

The answer is dominated by position size. Take a fixed 55% edge and vary only the risk per trade. Risking 10% means the account is ten losing trades deep, and the ruin probability is about 13%. Risking 5% — twenty units of cushion — drops it to under 2%. At 2% risk it is a small fraction of a percent, and at 1% it is effectively zero. Same edge, same strategy; the only change is size.

That is the whole argument for small position sizes, and it is arithmetic rather than temperament. Traders usually blow up not because their strategy was wrong but because they sized it so that ordinary bad luck was fatal.

Same edge, four different fates
Same edge (55% win rate). Only the bet size changes.Risk per tradeProbability of losing the account10%10 losses deep13.4%5%20 losses deep1.8%2%50 losses deep0.004%1%100 losses deep≈ 0%A 13% chance of ruin is roughly one account in eight.Traders rarely blow up because the strategy was wrong — they size it so ordinary bad luck is fatal.

Risking 10% per trade carries a ~13% chance of losing the account. At 2% it's under a hundredth of a percent. Nothing changed except position size.

For example

With a 55% edge, risking 10% of the account per trade carries roughly a 13% chance of ruin — about one account in eight. Cut the risk to 2% and that falls to well under a tenth of a percent. The edge never changed; only the bet size did.

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Why it matters to you

It reframes position sizing from a comfort question into a survival one. Nothing else about a strategy matters if you're not in the market when the edge finally shows up, and risk of ruin is the calculation that shows how quickly aggressive sizing turns a winning system into a coin flip on your account.

⚠ The model assumes your edge is real and constant

Ruin formulas take your win rate as a given. In practice edges decay, correlations mean supposedly separate positions lose together, and estimated win rates are optimistic. Every one of those pushes real ruin probability above the calculated figure, so treat the number as a floor rather than a forecast.

Frequently asked questions

What is risk of ruin?

It's the probability that a run of losses reduces your account to the point where you can no longer trade, before your edge has time to produce a profit. It depends on win rate, payoff and — most of all — how much you risk per trade.

How do you reduce risk of ruin?

Reduce risk per trade. Going from 10% to 2% per trade cuts ruin probability from roughly 13% to a fraction of a percent on the same edge. Improving the edge helps too, but position size is the far more powerful lever.

How much should you risk per trade?

Common practice is 1–2% of the account per trade, which keeps risk of ruin negligible for most realistic edges while still compounding meaningfully. Above about 5%, ordinary losing streaks start to become genuinely dangerous.

Can you have a profitable system and still go broke?

Yes — that's exactly what risk of ruin describes. If position size is large enough, a normal losing streak can end the account before the edge plays out. Profitability over the long run is irrelevant if you can't survive the short run.

Related terms

BacktestingBacktesting runs a precisely defined set of trading rules over historical data to see how they would have performed on it. It is the cheapest way there is to reject a bad idea, and a poor way to prove a good one.Curve fittingCurve fitting, or over-optimisation, is tuning a strategy until it fits the historical data almost perfectly — including the random noise in it. The result looks superb in a backtest and fails immediately in live trading.Equity curveAn equity curve plots the running total of an account or a strategy over time, updated after every single trade it takes. Its shape — the slope, the smoothness, the depth of its dips — says more about a system than the final number does.ExpectancyExpectancy is the average amount you can expect to win or lose per trade, given your win rate and the relative size of your wins and losses. It is the single number that says whether a strategy makes money.
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