Risk of Ruin
The probability that a series of losses reduces an account below the point of recovery.
Also called: ruin · blowing up
In plain language
Risk of ruin combines win rate, risk/reward and position size into a single probability: the chance of losing so much that continuing is not realistic.
The dominant variable is position size. A positive-expectancy strategy risking 25% per trade still has a meaningful chance of ruin; the same strategy at 1% is effectively safe from it.
Losing streaks are longer than intuition suggests. With a 40% win rate, a run of eight consecutive losses is entirely ordinary over a few hundred trades.
Why it matters
Survival is the precondition for every other outcome. A strategy that works but occasionally destroys the account has an expected long-run value of zero.
Common mistakes
- Assuming a positive edge makes ruin impossible.
- Underestimating the length of a normal losing streak.
- Sizing for the best case rather than for the worst plausible sequence.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The fixed share of your account you are willing to lose on any single trade.
The decline from an account’s peak value to its lowest point before a new peak.
The average amount you expect to win or lose per trade over a large sample.
The largest peak-to-trough decline an account or strategy has ever experienced.
The amount of an asset you buy or sell in a single trade.