What is the Risk of Ruin?

The Risk of Ruin calculates the probability that you will lose a certain percentage of your capital. It is commonly used by traders to refer to a situation where their account balance falls below the minimum requirements for it to continue trading. It’s also known as the Probability of Ruin.

What is the Risk of Ruin Calculator?

The Risk of Ruin (RoR) is a mathematical model that may be used to quantify the possibility of losing all account balances based on a trading system’s win/loss rate and the risk percentage used for each trade.

For example, if a trader has a system that performs well with a 30% win rate, with an average profit factor of 2, and risking 2% per trade, this data may be added to the Risk of Ruin Calculator and used to assess the trading system’s overall resilience. However, the calculator may also be used to manage the risk of strategy failure and/or peak-to-valley drawdown.

Using this calculator, traders may determine the likelihood of blowing their trading account over time using a specific trading strategy. This is calculated using the win rate % and the average risk percentage per trade. By entering data from a trading system’s performance records and using the RoR calculator above, traders may simply assess the risk of ruin for any trading method.

What Does the Risk of Ruin Calculator’s Result Mean?

Risk of peak-to-valley draw-down

This is the probability that you will hit your max draw down from an equity high. If you are successful in your trades, and you see a large peak forming on a chart of your trade performance, this just determines the likelihood that you reach your maximum drawdown after a successful run of trades.

Risk of ruin

This number is your overall percentage risk of hitting your max drawdown regardless of what kind of equity highs/lows you’ve experienced.

Now, verify the risk of ruin calculator for yourself.

Use the Risk of Ruin Calculator:

Win rate %: Traders should input the overall win rate percentage of the trading system. For example, assume a current trading strategy that yields a 30% win rate

Average profit/loss: Traders should input the average profit generated per winning trade, divided by the average loss per losing trade.

Risk per trade %: Countless times we’ve mentioned that as a rule of thumb, professional traders do not risk more than 2% of the account equity per trade. This skilled practice allows traders to stay on the markets for a longer amount of period and even recuperate account value lost due to past poor transactions. So, we’ll set the risk each transaction at 2%.

Number of trades:  If traders are testing a trading strategy and want to know how it will perform based on many future trades, then it’s only required to input the expected number of trades. It can be 30 daily trades, 15 weekly trades, and so on.

If traders are testing a current trading strategy and want to know how it’s performing and its risk of ruin percentage, then just input the total number of trades taken so far. Let’s have an example, we will input 50 as the total number of trades for our current trading strategy.

Max drawdown %: Traders must input the maximum drawdown % attained (with their existing trading strategy) or the expected maximum percentage if testing an alternative approach. For our example, we’ll input a 30% maximal drawdown achieved using our existing trading strategy.

Next, we hit the “Calculate” button. Then, the results will be displayed. 

Example Scenario:

Suppose a trader has the following parameters:

Win rate: 50%
Loss rate: 50%
Average win size: $100
Average loss size: $80
Maximum risk percentage: 10%
Trading capital: 10,000

When these values are entered into the Risk of Ruin Calculator, the calculated risk of ruin percentage is 8.63%. This suggests a low probability of experiencing big losses that would drain the trader’s money beyond recovery. As a consequence, the trader may proceed with confidence, knowing that their risk exposure is being handled appropriately based on the criteria provided.

Frequently Asked Questions:

1. What is a good risk of ruin?

Ans: In general, everything around and below 1% is acceptable but of course, that depends on the trader’s risk appetite. 

1. How is the risk of ruin calculated?

Ans: The risk of ruin is typically calculated as a loss probability, where it is known as the “probability of ruin.” These calculations can be conducted using a value-at-risk (VaR) measure.