Risk of Ruin Calculator

Evaluating Account Survival and Ruin Probability

Risk of Ruin is a statistical calculation measuring the probability that an account will sustain a series of losing trades severe enough to hit a predefined ruin threshold (such as a 50% drawdown or complete capital loss).

Traders use this calculator to verify that their risk allocation percentage per trade is low enough to navigate normal statistical losing streaks without breaching maximum account risk limits or triggering margin calls.

Probability Formula Breakdown

Mathematical ruin probability incorporates win/loss probabilities and total allowable risk units:

Win Ratio (W) = Win Rate % / 100

Loss Ratio (L) = 1 - Win Ratio

Risk Units to Ruin = Ruin Threshold % / Risk Per Trade %

Risk of Ruin (%) = [(Loss Ratio / Win Ratio)]^(Risk Units to Ruin) × 100

(Note: If Win Ratio is less than or equal to Loss Ratio, Risk of Ruin mathematically equals 100%.)

Step-by-Step Worked Example

Suppose you trade with a 55% Win Rate, risk 2% per trade, and define ruin as reaching a 50% account drawdown.

1. Determine Ratios: W = 0.55; L = 0.45. Ratio (L/W) = 0.45 / 0.55 = 0.81818.
2. Calculate Risk Units: 50% Drawdown / 2% Risk = 25 consecutive risk units.
3. Calculate Ruin Probability: (0.81818)^25 × 100 = 0.67% Risk of Ruin.

A 0.67% Risk of Ruin indicates a highly resilient account model where the statistical probability of reaching a 50% drawdown remains below 1%.

Common Mistakes Traders Make

• Over-leveraging Trade Sizing (5% to 10% Risk): Risking 10% per trade means a 50% drawdown requires only 5 losing trades, causing Risk of Ruin to surge above 30%.
• Assuming Win Rates Remain Static: Shifting market regimes temporarily lower win rates, transforming a safe system into a high-risk model.
• Violating Kelly Criterion Allocation Limits: Over-allocating capital beyond optimal Kelly fraction limits exponentially increases probability of severe drawdown.

Frequently Asked Questions

What is an acceptable Risk of Ruin benchmark?
Institutional risk standards require Risk of Ruin calculations to stay strictly below 1.0%.

How can I reduce Risk of Ruin immediately?
Lower your risk percentage per trade (e.g. from 3% to 1%). Lowering trade risk increases the number of losing trades required to reach ruin.