Risk of Ruin Calculator

The "Risk of Ruin" is a statistical concept used in algorithmic trading and finance to calculate the mathematical probability that an account will be completely depleted (blown) before reaching a specified level of success.

Why Risk Per Trade Matters

Many novice traders risk 5% to 10% of their account balance per trade. While this can lead to fast gains, a completely normal statistical losing streak (e.g., 5 to 10 losses in a row) will mathematically decimate the account. For example, if you risk 10% per trade and hit a 5-trade losing streak, your account is down nearly 41% (due to compounding decay). Recovering a 41% drawdown requires a 69% gain just to get back to breakeven.

The Equation of Trading Success

Your ultimate survival as a trader relies on the interplay of three metrics:

• Win Rate: The percentage of trades that are profitable.
• Payoff Ratio (Reward-to-Risk): How much you win on average versus how much you lose on average. A 1:2 ratio means you win $200 when you are right, and lose $100 when you are wrong.
• Risk Per Trade: The percentage of equity risked on a single trade.

By keeping your Risk Per Trade below 1% to 2%, you allow your edge (Win Rate + Payoff Ratio) to play out over a large sample size of trades without succumbing to the mathematical certainty of short-term variance and losing streaks.