Risk of ruin is the probability that a losing run takes you past a line you can't come back from, worked out before it happens. Most traders only check what a strategy returns. This checks if you survive long enough to get it. It comes down to three things: your edge, your risk per trade, and where you draw the line.
What is risk of ruin?
It's a survival number... the chance your account drops to a level you've called ruin. Ruin doesn't have to mean zero. For most traders it's the drawdown that ends the account in practice: the one that breaks a prop firm rule, the one that makes you quit, or the one you have to explain at home. Pick that line yourself, because the answer is only as honest as the line you feed it. But yes, it can be zero.
What drives it?
Three inputs, and they don't carry equal weight. Your edge per trade, your risk per trade, and how deep the hole goes before you call it ruin. Here's one strategy at four risk levels, with a 50% win rate paying 1.5 to 1 and ruin set at a 30% drawdown:
| Risk per trade | Chance of hitting a 30% drawdown |
|---|---|
| 1% | under 0.01% |
| 2% | about 0.2% |
| 5% | about 9% |
| 10% | about 30% |
Same edge in every row. Only the size changed. That's the lesson in one table: doubling your edge helps a little, halving your risk per trade moves the number far more. Position sizing is key here.
What is an acceptable risk of ruin?
Under 1% is the usual answer and a fine place to start. Treat it as a floor, not a promise. It assumes your win rate and edge are real, your trades are independent, and you keep sizing the way you said you would. Break any of those and the true risk sits higher automatically.
Where the number lies to you
Start with the inputs. Give it a win rate from 30 trades and you get a comforting answer built on luck, which is the most common mistake in our risk of ruin calculator. Correlated positions are the second one: five forex pairs that all lose together are one bet, not five. And if you trade a prop account, your real ruin line is the daily loss limit, which sits much closer than the 30% in that table... that's the tough truth. Drawdown recovery covers the other half of the problem, how much it takes to climb back up once you're down.
Frequently asked questions
Related terms
- Sortino Ratio — How much return a strategy earns for the losses it actually makes you feel.
- Maximum Drawdown — The deepest hole a strategy has dug you into, peak to bottom.
- Sharpe Ratio — How much return a strategy earns for every unit of risk it takes.
- Volatility — How much and how fast a strategy's returns swing around.