Risk of Ruin Calculator — User Guide & Reference
Risk of ruin estimates the probability that a sequence of losing trades depletes your account to the point where you cannot keep trading. This guide explains the estimate, why expectancy is not enough, and a worked example.
Disclaimer: This guide is provided for education only and does not constitute investment advice.
What risk of ruin estimates
Ruin means the account falls to or below a level where trading can no longer continue. Risk of ruin is the probability that a run of losses gets there before the account can recover, estimated from win rate, payoff, and the fraction risked per trade.
Why positive expectancy is not enough
Expectancy is an average over many trades; ruin is about the worst sequence that can hit before the average plays out. A long early losing streak can ruin an account that would have been profitable over a long enough sample.
How position size controls the answer
The larger the fraction of the account risked per trade, the fewer consecutive losses it takes to reach ruin. This is the single biggest lever on survival: small, disciplined sizing makes ruin unlikely no matter what the market does next.
Worked example: cutting risk from 5% to 1%
Your strategy wins 55% with a 1:1 payoff. Risking 5% per trade, a losing streak of twenty trades could cut the account in half — ruin is uncomfortably likely. Cutting risk to 1% per trade makes ruin far less likely, because each loss removes a much smaller slice.
How to use the calculator
Enter your win rate, payoff, and the fraction risked per trade. Read the ruin probability. Aim for near zero, and recalculate whenever your edge estimate changes, because a falling win rate sharply raises the risk.
Common mistakes
The most common mistake is believing positive expectancy guarantees survival. Another is sizing aggressively because the edge is real. And trusting the estimate as exact is wrong — the model depends on inputs that are themselves estimates.
Parameters explained
| Parameter | What it means |
|---|---|
| Win rate | The probability of a winning trade. |
| Payoff | The win/loss ratio. |
| Risk per trade | The fraction of the account risked on each trade, or a fixed loss. |
Key concepts
Ruin
The account balance falling to or below a level where trading can no longer continue.
Loss streak
Consecutive losing trades, which risk-of-ruin explicitly models.
Kelly link
Over-sizing accelerates ruin; under-sizing lowers the probability but also lowers growth.
Mistakes traders make
✗ Believing positive expectancy guarantees survival
✓Expectancy is an average; ruin is about the worst sequence that can arrive first. A long early losing streak can end an account that would have won over time.
✗ Sizing positions aggressively because 'the edge is real'
✓Over-sizing is precisely how positive-edge strategies go broke. The edge deserves small, disciplined bets.
✗ Trusting the estimated probability as exact
✓The model depends on your win rate and payoff, both of which are estimates. Treat the figure as a warning sign, not a precise forecast.
When this tool fits — and when it does not
Use it when
- ✓Before increasing position size, to quantify what the extra risk does to survival odds.
- ✓When choosing a risk-per-trade percentage for a new strategy.
- ✓As a gut check when a strategy's backtest looks tempting.
Skip it when
- ✗Trading a strategy whose ruin probability you refuse to calculate.
- ✗Reading a low ruin risk as permission to abandon stop losses.
- ✗Treating the number as static — it changes with every input.
Practical tips that actually help
Aim for ruin risk close to zero
Most disciplined traders want survival odds near certainty. If the model shows meaningful ruin risk at your current size, that is a signal to shrink.
Recalculate when your edge estimate changes
If your win rate falls in live trading, your ruin risk can jump sharply. Revisit the number with fresh data.
Use it before adding capital
A strategy can survive at one size and ruin at another. Run the model again before scaling up.
Related & next steps
Frequently asked questions
What is an acceptable risk of ruin?▾
Many aim close to zero. The exact tolerance is personal, but the point is to make the number explicit before increasing risk.
Is a positive expectancy enough to avoid ruin?▾
No. Expectancy is an average over many trades; ruin is about the worst sequence that can hit before the average plays out.
How does position size affect risk of ruin?▾
Directly and strongly. The larger the fraction risked per trade, the fewer consecutive losses it takes to reach ruin.
Why is risk of ruin a probability rather than a certainty?▾
Because the order and clustering of wins and losses are random. The model estimates the chance of a ruinous sequence.
What inputs matter most for the estimate?▾
Win rate, the payoff ratio, and the fraction risked per trade. Small errors in win rate produce large errors in ruin probability.
Should I recalculate after my edge changes?▾
Yes. If your win rate falls in live trading, your ruin risk can jump sharply. Revisit the number with fresh data.
- Type
- User guide
- Updated
- 2026-09
- Source
- SoloTrade.io educational content
Risk of ruin is a probabilistic model with simplifying assumptions, not a precise forecast of outcomes.