What “ruin” actually means
Risk of ruin is the probability that a trading account falls to some level you have defined as failure, before it grows, given a strategy's win rate, its payoff ratio and how much you risk per trade.
The definition of failure matters more than people expect. The textbook version is a zero balance, which is close to useless: with fixed-fractional sizing you are always risking a percentage of what remains, so the balance approaches zero asymptotically and technically never arrives. On that definition almost every strategy has a risk of ruin near zero, which is a comforting number that tells you nothing.
The version worth calculating uses a drawdown you would not come back from — in practice, not in theory. For most people that is somewhere between 25% and 50%, and the binding constraint is psychological rather than arithmetic. An account down 40% needs a 67% gain to recover. Very few people keep executing the same plan, at the same size, with the same patience, while carrying that. Most either stop, or double up to get it back — and the second one is what actually ends accounts.
Ruin is the drawdown at which you would stop following the plan. Not the drawdown at which the money runs out. If you know that a 30% drawdown would make you abandon the strategy, then 30% is your ruin level, and calculating against 100% is self-flattery.
Three inputs, and only one is under your control
The calculation needs:
- Win rate — the proportion of trades that close in profit. This is a property of your strategy and the market. You can measure it; you cannot really choose it.
- Payoff ratio — average win divided by average loss. Also mostly a property of the strategy, though it is the one people over-estimate most, because a plan's stated ratio and its realised ratio diverge as soon as you start taking profits early.
- Risk per trade — the fraction of the account you lose when a trade goes against you. This one is entirely yours.
That asymmetry is the whole practical message. Win rate and payoff come from the market and are hard to move by more than a few points. Risk per trade is a number you type in, and it has a far larger effect on survival than either of the other two. You cannot decide to win more often. You can decide to lose less each time.
The first two inputs combine into expectancy — the average result per trade, in units of your risk:
expectancy = (win rate × payoff ratio) − (1 − win rate)
A strategy that wins 45% of the time with a payoff ratio of 2.0 has an expectancy of (0.45 × 2.0) − 0.55 = +0.35R. It makes, on average, 0.35 times your risk per trade. If expectancy is negative, no sizing scheme saves you and risk of ruin approaches certainty; sizing only changes how long it takes. Everything below assumes expectancy is positive.
The table that settles the argument
Here is the probability of hitting a 50% drawdown at some point over a 1,000-trade run, for a strategy with a genuinely positive edge — 50% win rate, payoff ratio 1.5, expectancy +0.25R. This is a good strategy. Better than most people actually have.
| Risk per trade | Chance of a 50% drawdown | What that means |
|---|---|---|
| 0.5% | under 1% | Effectively safe. The edge compounds without drama. |
| 1% | ~2% | Comfortable. One run in fifty gets uncomfortable. |
| 2% | ~15% | One run in seven ends in a drawdown most people do not trade through. |
| 3% | ~40% | A coin-flip-ish chance of ruin on a profitable strategy. |
| 5% | above 80% | The edge is irrelevant. The sizing decides the outcome. |
Read the 2% row again, because 2% is the number handed out most freely as a sensible default. On a genuinely good strategy it carries roughly a one-in-seven chance of a drawdown that ends most trading careers. Not a one-in-seven chance of a bad month — a one-in-seven chance of the outcome you were trying to avoid entirely.
And notice the shape of the column. Going from 1% to 2% does not double the risk; it multiplies it by about seven. From 2% to 5% is not a 2.5× increase in danger, it is the difference between a manageable strategy and a doomed one. Risk of ruin is violently non-linear in the one input you control, which is exactly why intuition handles it so badly. Halving your size does not halve your risk of ruin. It roughly removes it.
You will get the losing streak. Here is how long.
People accept losing streaks in principle and are still shocked by them in practice, because the arithmetic of streaks is unintuitive. Over 500 trades, the longest run of consecutive losses you should expect — not fear, expect — is:
| Win rate | Longest expected losing run |
|---|---|
| 60% | 7 in a row |
| 50% | 9 in a row |
| 40% | 12 in a row |
| 33% | 15 in a row |
A trend-following strategy that wins a third of the time and makes its money on the tail is a perfectly respectable strategy, and it will hand you fifteen consecutive losses inside a normal year. At 2% risk, fifteen straight losses is roughly a 26% drawdown — from nothing going wrong. That is the strategy working as designed.
This is the number to internalise before you choose a risk percentage. Not "what if I have a bad run", but "when I have the bad run that my win rate guarantees, what will the account look like, and will I still be executing?"
Drawdown is the real limit, not ruin
In practice, almost nobody is stopped by ruin. They are stopped by a drawdown that changed how they trade. The sequence is always the same, and it is worth writing down because recognising it in yourself is most of the defence:
- A normal losing streak takes the account down 20–30%.
- The plan starts to feel wrong. Entries get skipped — usually, by bad luck that is not really bad luck, the ones that would have worked.
- Size goes up on a trade that feels certain, to make the recovery faster.
- That trade is a normal loss, at three times normal size.
- The account is now down 45% and the strategy is being blamed for an outcome that sizing produced.
The strategy never stopped working. Step 3 is where the damage happened, and step 3 is made much more likely by a risk percentage that let step 1 get deep enough to hurt. Choosing a smaller risk per trade is not primarily about the arithmetic of survival — it is about never generating the drawdown that makes you a worse trader.
Worked example: choosing a number
From a trade log to a risk percentage
You have 180 recorded trades. 79 winners, 101 losers — a 43.9% win rate. Average win $412, average loss $196, a payoff ratio of 2.10.
expectancy = (0.439 × 2.10) − 0.561 expectancy = 0.922 − 0.561 = +0.36R
A real edge. Now the constraints. At a 43.9% win rate, expect a longest losing run of about 11 in a 500-trade sample. You have decided honestly that a 25% drawdown is where you would stop trusting the plan.
Eleven consecutive losses at risk r leaves you at (1−r)11 of starting equity:
| Risk per trade | After 11 straight losses | Verdict |
|---|---|---|
| 1.0% | −10.4% | Uncomfortable, survivable, plan intact. |
| 1.5% | −15.3% | Near the edge of tolerable. |
| 2.0% | −19.9% | Right at the 25% line before anything else goes wrong. |
| 2.5% | −24.3% | The expected streak alone reaches your stopping point. |
The defensible answer is 1%, possibly 1.25%. Not because a book said so, but because the expected losing streak for this specific win rate, at this size, lands inside the drawdown this specific person can tolerate. That is a number you can defend, and more importantly it is a number you can still be following in month nine.
Where this calculation lies to you
Risk of ruin is a model, and it is optimistic in every direction that matters.
- It assumes your trades are independent. They are not. Losses cluster, because the market conditions that break a strategy persist for weeks. Real losing streaks are longer and more bunched than the independent-draw model produces.
- It assumes your loss is the size you planned. Gaps, halts and slippage produce losses larger than 1R, and they arrive during precisely the volatile stretches when you are already down.
- It assumes your win rate is stable. The figure you measured came from a particular market regime. When the regime changes, the win rate changes with it, and you will be sizing on a number that has quietly stopped being true.
- It assumes you behave. Every one of these calculations assumes you take the next trade at the correct size after nine losses. The model has no term for the person operating it, and that is where most real ruin comes from.
Every one of those pushes the true risk higher than the calculated one. Which is the argument for treating the table as a ceiling rather than a target: whatever number the arithmetic says you can afford, the number you should actually use is smaller.
Once you have chosen it, position sizing is the mechanical step that turns the percentage into a lot, share or contract count.