Risk of ruin
Risk of ruin is the chance that a run of losses takes an account down to a level where trading has to stop. It depends on how much is risked per trade and on the win rate and payoff.
How Risk of ruin is calculated
There is no single formula for real trading, so it is often estimated by simulation: repeat a sequence of random trades many times with your win rate, payoff and risk per trade, and count how often the account touches a ruin level. For a coin-flip game with a fixed payoff the closed forms are standard textbook results, but they assume the odds are known.
How it is read
Halving the fraction risked per trade reduces the chance of ruin by far more than half. Losing streaks are normal in any rule with a win rate under 100 percent.
Common mistakes
- Estimating it from a win rate measured on a small sample.
- Using the average loss and ignoring the worst one.
- Treating it as zero because the backtest never touched the ruin level.
What Tickfloor tested
Tickfloor has not published a backtest of a rule built only on Risk of ruin. It describes or manages something rather than giving a signal, so there is no strategy to score. It still shapes how any tested rule should be read.
Lessons that cover it
- Losing streaks and how accounts blow up
- Fixed-fraction sizing, fixed-dollar sizing and the risk of ruin
- Storm Financial: borrowing on borrowing
- 15 January 2015: the Swiss franc day
- Oil below zero: 20 April 2020
Related concepts
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.