Risk of RuinRoR
Risk of ruin is the probability that losses shrink an account to a point where you can no longer trade your plan; it rises quickly with larger risk per trade.
A strategy can have a genuine edge and still destroy an account. If the bets are too large, an ordinary run of bad luck can take the account below the point where trading can continue — and there is no coming back from zero. Risk of ruin is the probability of that happening. It depends on three things: the edge, the size of each bet, and how far down counts as “ruined”. This entry explains the idea, shows how quickly it grows with bet size, and gives the practical rules that keep it low.
- Category
- Risk Management
- Reading time
- 5 min
- Also called
- Probability of ruin, Gambler's ruin, Ruin probability
- Updated
Risk of ruin in plain words
Imagine flipping a slightly favourable coin. If you bet 1% of your money each time, you would need an absurd losing streak to go broke.1 If you bet 25% each time, four or five bad flips in a row can end the game — even though the coin favours you.
“Ruin” does not have to mean zero. Many traders define it as a drawdown they could not recover from emotionally or financially, such as −50%. See Drawdown.
How to keep risk of ruin low, step by step
Define ruin
Pick the drawdown at which you would stop trading the plan — for example −30% or −50%.
Know your edge
Win rate and average win and loss, from enough trades. See Expectancy.
Choose risk per trade
The single biggest lever. Smaller fractions shrink risk of ruin dramatically. See Risk per Trade.
Count streaks
Estimate how many losses in a row your ruin level allows; compare with how often such streaks happen.2
Simulate
Reshuffling your historical trades many times (Monte Carlo) shows the range of possible drawdowns. See Backtesting.
Cut size in drawdowns
Risking a fixed percentage of the current account automatically shrinks bets as the account falls.
Worked examples
Example 1 — Losses to a −50% drawdown
StreaksHow many consecutive losses take an account down 50%, risking a fixed share of the current balance each time?
| 1% per trade | ≈ 69 losses in a row |
| 2% per trade | ≈ 35 losses in a row |
| 5% per trade | ≈ 14 losses in a row |
| 10% per trade | ≈ 7 losses in a row |
Seven losses in a row is common for many strategies; sixty-nine is practically impossible with any real edge. Bet size decides which world you live in.
Example 2 — How often streaks happen
ProbabilityA strategy wins 40% of trades. What is the chance that a given run of 8 trades contains no winner?
| 0.6⁸ | ≈ 1.7% |
| Over 500 trades | An 8-loss streak is very likely to occur at some point |
Rare-looking streaks become near-certain over hundreds of trades. Size for the streaks you will meet, not the ones you hope to avoid.
Example 3 — The same edge, two sizes
Over-bettingTwo traders use the same system with positive expectancy. One risks 1%, the other 8%. Both hit a 10-trade losing streak in month three.
| 1% trader | ≈ −9.6%, keeps trading |
| 8% trader | ≈ −56.6%, past the ruin level |
Same edge, same luck — different outcome. Over-betting turns a winning system into a losing account.
The same losing streak at different risk levels
What drives risk of ruin
| Aspect | Lowers risk of ruin | Raises risk of ruin |
|---|---|---|
| Bet size | Small fixed fraction | Large or increasing bets |
| Edge | Positive, well-tested expectancy | Zero or negative expectancy |
| Win rate | Higher, with steady payoffs | Low, with rare large wins (at large size) |
| Behaviour | Cutting size in drawdowns | Raising size to recover losses |
Why traders think about ruin
Choosing risk per trade
Sizing so that realistic losing streaks are survivable.
Evaluating leverage
Leverage raises effective bet size and with it the risk of ruin. See Leverage.
Prop-firm rules
Maximum drawdown limits are a hard “ruin” level; sizing must respect them.
Long-term survival
Staying in the game is a precondition for any edge to pay off.
Advantages and disadvantages
Advantages
- Puts the focus on survival, not just returns.
- Gives a clear reason to keep bet size small.
- Can be estimated from journal or backtest data.
Disadvantages
- Formulas assume a stable edge, which markets rarely provide.
- Gaps and slippage can make losses larger than planned.
- Depends on the chosen definition of ruin.
- Estimates are sensitive to small changes in win rate.
Going deeper
Read as far as you need. Each level builds on the one before it.
Negative expectancy guarantees ruin eventually
Beginner
If the average trade loses money, no sizing method avoids eventual ruin; small bets only make it slower.
Losses in a row to a given drawdown
Intermediate
With fixed-fraction risk r, the number of consecutive losses to a drawdown D is ln(1 − D) ÷ ln(1 − r). At r = 2% and D = 50%, that is about 34.3 — so 35 losses take you past −50%.
Monte Carlo estimates
Advanced
Rather than closed-form formulas, many traders resample their real trade results thousands of times, in random order and at a chosen risk per trade, and count how often the account hits the ruin level. It captures the shape of real wins and losses better than simple formulas.
Common mistakes
Believing an edge makes you safe
Over-betting can ruin a positive-expectancy strategy.
Increasing size after losses
The fastest route to ruin. See Loss Chasing.
Ignoring correlated positions
Several positions in one theme act like one large bet. See Risk Stacking.
Using too few trades to estimate the edge
An overestimated edge leads to oversized bets.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Risk of ruin is the chance of falling to a drawdown you cannot recover from.
- It depends on edge, bet size and your definition of ruin.
- Bet size is the biggest lever: small fixed fractions keep it tiny.
- Long losing streaks are almost certain over many trades.
- Negative expectancy leads to ruin regardless of sizing.
Frequently asked questions
What is an acceptable risk of ruin?
Is risk of ruin the same as maximum drawdown?
Can I calculate risk of ruin exactly?
Further learning
- Risk per Trade
The main tool for keeping ruin unlikely.
- Drawdown
What “ruin” is measured against.
- Expectancy
The edge that ruin calculations assume.
- Leverage
How leverage multiplies effective bet size.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CME Group. The 2% Rule (opens in a new tab) Checked .
- CME Group. Controlling Risk (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.