Guides / Risk of Ruin, Explained
GUIDERisk of ruin, explained without the hand-waving.
It's the one number that tells you whether your edge and your position size actually fit together. Here's the real formula, a worked example, and where most traders get it wrong.
Quick answer: risk of ruin is the probability that a losing streak, combined with your position size, wipes out your account before your edge has room to play out. It depends on three things — your win rate, your average win/loss ratio, and how much you risk per trade. Move any one of them a little, and the number moves a lot faster than most traders expect.
Why risk of ruin matters more than your win rate
Most traders obsess over win rate. It's the number that shows up in every backtest report, so it's the number people anchor to. But win rate on its own tells you almost nothing about whether an account survives. A 60% win rate with oversized positions can ruin an account faster than a 40% win rate with disciplined sizing.
The formula behind the number
The classic simplified version of risk of ruin looks like this, where edge is your win rate minus your loss rate, and units is how many "risk units" your account is broken into (account size divided by risk per trade):
You don't need to compute this by hand. Our free Risk of Ruin calculator runs the full version instantly from your win rate, reward-to-risk ratio, and risk per trade — this section is here so you understand what's actually driving the number it gives you.
A worked example
Take a strategy with a 55% win rate and an average reward-to-risk of 1.2. Run it two ways:
- Risking 2% per trade — a modest, deterministic edge with room for a normal losing streak to play out without threatening the account.
- Risking 5% per trade on the exact same strategy — the same edge, but the risk of ruin climbs sharply, because a run of 6–8 losses (entirely normal variance for a 55% win-rate strategy) now removes a meaningfully larger share of the account each time.
Nothing about the strategy changed between those two scenarios. Only the position size did — and that alone was enough to move the strategy from statistically safe to statistically fragile.
Where traders push their own risk of ruin higher without noticing
- Sizing positions off gut feel or "conviction" on a given trade, instead of a fixed percentage tied to the backtested edge.
- Running several strategies that all key off similar setups or pairs — treating each one's risk budget as independent when they're actually correlated.
- Widening stops or averaging into losers, which quietly changes the loss side of the ratio the original calculation assumed.
- Reusing win-rate assumptions from an old backtest after live performance has already started drifting from it.
- Increasing size right after a winning streak, on the assumption that the edge has been "proven" rather than just sampled.
What to actually do with your risk of ruin number
Treat it as an input to sizing, not a one-time badge of honor. Recompute it whenever your sample size changes meaningfully, whenever you add or drop a strategy, or whenever live results start to diverge from the backtest. The number is only as good as the assumptions behind it — a stale win rate produces a confidently wrong answer.
See your own risk of ruin against real numbers, then keep drawdown in check while it runs live.
Open the calculator