Risk of Ruin
The statistical probability that a trader will lose enough capital to be forced out of trading entirely, given their edge and risk per trade.
Formula
Risk of Ruin ≈ ((1 − Edge) / (1 + Edge))^N [simplified; Edge = Win Rate − Loss Rate]
Risk of ruin answers: "Given my win rate, R:R, and position sizing, what are the odds I eventually go broke?" It is the ultimate constraint on risk parameters — even a positive-expectancy system can have a non-zero risk of ruin if position sizes are too large.
Risk of ruin falls rapidly as position size decreases, and rises sharply as risk per trade increases. A system risking 1% per trade with positive expectancy typically has a near-zero risk of ruin; the same system at 10% per trade may have meaningful ruin probability.
Related Terms
Black Swan
An extreme, unpredictable, high-impact event that falls outside the range of normal expectations and is rationalised as predictable only in hindsight.
IntermediateCapital Preservation
The principle of protecting trading capital above all else — because you cannot trade without capital, survival is the first objective.
BeginnerDrawdown
The peak-to-trough decline in account equity from a high point to the subsequent low before a new high is reached.
BeginnerExpectancy
The average dollar amount you expect to make per dollar risked, calculated from your win rate and average win/loss sizes.
IntermediateKelly Criterion
A formula that calculates the theoretically optimal fraction of capital to risk per trade to maximise long-run account growth without ruin.
AdvancedMaximum Drawdown
The largest peak-to-trough equity decline recorded over a strategy's full history — the worst-case loss an investor would have experienced.
IntermediateRisk Per Trade
The percentage or dollar amount of your account you are willing to lose on a single trade. Typically 0.5–2% for most traders.
BeginnerRisk Tolerance
The maximum level of financial loss and psychological discomfort a trader can absorb without deviating from their strategy.
BeginnerWin Rate
The percentage of trades that close at a profit. High win rate does not guarantee profitability without a favourable risk-reward ratio.
Beginner