What is risk of ruin?

It is the probability that an account hits a chosen drawdown level (ruin) before the strategy's positive edge grows it away from danger, given win rate, payoff ratio and risk per trade.

How is it calculated?

Each trade wins +R units or loses 1 unit of risk. The per-unit ruin root r* solves p·r^(R+1) − r + q = 0, and risk of ruin = r* raised to the number of 1R losses needed to hit the ruin drawdown.

Why does risking less per trade help so much?

Ruin probability is the per-unit root raised to the number of loss units in your drawdown budget. Halving risk per trade roughly doubles that exponent, which shrinks the probability geometrically, not linearly.

What if my expectancy is zero or negative?

With no positive edge the model returns 100% — given enough trades, a zero- or negative-expectancy strategy always reaches the ruin level eventually.

What ruin threshold should I use?

Use the drawdown that would realistically end your trading: a prop-firm max drawdown (often 6–10%), the point where you'd lose confidence, or a hard personal stop — rarely a literal 100% loss.

Is this the same as the Kelly criterion?

No — Kelly gives the growth-optimal risk fraction from your edge, while risk of ruin measures the survival probability of a risk fraction you choose. They answer complementary questions and use the same inputs.

Risk & Money Management

Risk of Ruin Calculator

Estimate the probability of hitting a fatal drawdown from win rate, payoff ratio, risk per trade and your ruin threshold. See how smaller risk cuts ruin fast.

Risk of ruin is the probability that a trading account hits a chosen drawdown level before the strategy's edge grows it safely away, given win rate, payoff ratio and risk per trade.

Risk of ruin

1.16%

Edge per trade: +0.1R
Loss units to ruin: 22.2
Per-unit ruin root: 0.8182

Two-outcome model with fixed win/loss sizes; treat as an estimate, not a guarantee.

Worked example

A strategy wins 55% of the time at 1:1 payoff. The trader risks 1% per trade and treats a 20% drawdown as ruin.

Edge per trade: 0.55 × 1 − 0.45 = +0.10R
Per-unit ruin root: q ÷ p = 0.45 ÷ 0.55 = 0.8182
Loss units to ruin: ln(1 − 20%) ÷ ln(1 − 1%) = 22.2 units
Risk of ruin: 0.8182²²·² ≈ 1.16%

There is roughly a 1.2% chance of hitting the 20% drawdown before the edge compounds the account away from danger. Risking 2% per trade instead would push that probability up sharply — ruin risk grows exponentially with risk per trade.

How this is calculated

The model treats each trade as a bet that wins +R units of risk with probability p or loses 1 unit with probability q = 1 − p. The per-unit ruin root r* is the smallest solution in (0, 1) of:

p·r^(R+1) − r + q = 0

For a 1:1 payoff this reduces to the classical r* = q ÷ p. The number of consecutive 1R losses that reaches your ruin drawdown under fixed-fractional sizing is u = ln(1 − ruin) ÷ ln(1 − risk), and:

risk of ruin = r*^u

If expectancy (p×R − q) is zero or negative, no amount of sizing discipline helps — the probability is 100% in the long run.

When to use this calculator

Use this when setting or defending your risk-per-trade number. Feed in your strategy's win rate and payoff ratio, pick the drawdown that would genuinely end your trading, and the output shows whether 0.5%, 1% or 2% per trade keeps ruin at a rounding error or a real possibility.

It is most valuable for prop-firm traders and anyone with a hard drawdown limit: set the ruin threshold to the firm's maximum drawdown and the tool becomes an estimate of the probability of failing the account at your current risk settings.

Re-run it whenever your trade statistics update meaningfully. A small drop in win rate or payoff ratio can move ruin risk by an order of magnitude, and seeing that sensitivity is a strong argument for conservative inputs.

Common mistakes

Feeding in a win rate and payoff from a small or lucky sample — risk of ruin is extremely sensitive to overstated edge.
Treating the number as exact — the model assumes every trade risks the same fraction with fixed win/loss sizes, which real trading only approximates.
Setting the ruin threshold at 100% — most traders are stopped far earlier by a prop-firm limit, margin call or loss of confidence, so use the drawdown that would actually end your trading.

Frequently asked questions

What is risk of ruin?: It is the probability that an account hits a chosen drawdown level (ruin) before the strategy's positive edge grows it away from danger, given win rate, payoff ratio and risk per trade.
How is it calculated?: Each trade wins +R units or loses 1 unit of risk. The per-unit ruin root r* solves p·r^(R+1) − r + q = 0, and risk of ruin = r* raised to the number of 1R losses needed to hit the ruin drawdown.
Why does risking less per trade help so much?: Ruin probability is the per-unit root raised to the number of loss units in your drawdown budget. Halving risk per trade roughly doubles that exponent, which shrinks the probability geometrically, not linearly.
What if my expectancy is zero or negative?: With no positive edge the model returns 100% — given enough trades, a zero- or negative-expectancy strategy always reaches the ruin level eventually.
What ruin threshold should I use?: Use the drawdown that would realistically end your trading: a prop-firm max drawdown (often 6–10%), the point where you'd lose confidence, or a hard personal stop — rarely a literal 100% loss.
Is this the same as the Kelly criterion?: No — Kelly gives the growth-optimal risk fraction from your edge, while risk of ruin measures the survival probability of a risk fraction you choose. They answer complementary questions and use the same inputs.