Why "ruin" is a drawdown, not zero
If you risk a fixed amount of money on every trade, a long enough losing run takes the account to zero. That is the classic risk of ruin, and the approximation in Module 4 of the Masterclass estimates it. If you risk a share of the current balance, as the Masterclass teaches, every loss makes the next position smaller, so the balance never quite reaches zero. Ruin then means the drawdown at which you have to stop: a prop firm's maximum loss, the point where you no longer trust the strategy, or the loss you cannot afford. That limit is the number you enter.
How the calculation works
Each trade wins with your win rate p and adds R times the risk, or loses the risk r. After k wins and l losses the balance is:
For a fall below the starting balance, the calculator walks through the trades one at a time and keeps, for every number of wins so far, the chance of being there without having crossed the limit. For a fall below a high, only the wins and losses since the last high matter, so it keeps the chance of every such pair; a new high sends that path back to the start. Paths with a chance below one in a billion billion are dropped and their total is tracked, so every figure is exact to far better than the 0.1% it is shown to. Nothing is simulated, so the same inputs always give the same answer.
Example 1: 50% at 1.5R, 250 trades, a 20% limit
The average trade makes +0.25R, a real edge. At 1% per trade the chance of a 20% drawdown from a high is 0.8%, about 1 in 120, and a 10% drawdown happens in 41.8% of 250-trade runs. The same strategy at 2% per trade reaches 20% from a high in 36.3% of runs, and at 3% in 85.0%. The edge did not change; the risk per trade did.
Example 2: a prop firm challenge with a 10% limit
55% winners at 1:1, 100 trades. At 1% per trade the chance of a 10% trailing drawdown is 21.4%, and of a static 10% loss below the starting balance 6.8%. At 0.5% per trade those fall to 0.7% and 0.3%; at 2% they rise to 80.4% and 29.0%. Check which kind of limit your firm uses: a trailing limit is much easier to hit. The prop firm rules guide explains the difference.
Example 3: no edge
50% winners at 1:1: the average trade makes nothing before costs. At 1% per trade a 20% drawdown from a high happens within 250 trades in 30.8% of runs and within 1,000 trades in 89.5%. Without an edge, careful sizing only buys time.
Example 4: a trend follower, 40% at 2R
Low win rates are normal for strategies that let winners run. The average trade makes +0.2R. At 1% per trade over 250 trades the chance of a 20% drawdown from a high is 9.2%; of a 10% one, 78.0%. A trader with this system should expect a 10% drawdown in most 250-trade stretches and size so that it is survivable.
Why the real risk is higher
The calculator assumes every trade is independent with the same win rate and the same average win. Real trading bends all three. Losses cluster when the market stops suiting a strategy, costs and slippage shave every result, and a stop can be filled worse than planned when price gaps. Most of all, your win rate and average win are estimates: 25 wins out of 50 trades fits a true win rate anywhere from about 36% to 64%. Enter the lower end of what your record supports, and treat the answer as the least risk you are taking, not the most. The losing streak calculator shows the streaks behind these drawdowns, and the position size calculator turns a risk per trade into lots.
Questions
- What is risk of ruin in trading?
- The chance that a series of losses takes the account to the point where you have to stop. With a fixed amount of money per trade that point is zero; with a share of the current balance it is a drawdown limit - your own, or a prop firm's maximum loss. It depends on the win rate, the average win compared with the risk, the risk per trade and the number of trades.
- What risk per trade keeps it low?
- There is no single safe number, because it depends on the edge and on the limit. The table above shows your own case. As a reference, a 50% strategy at 1.5R has a 0.8% chance of a 20% drawdown within 250 trades at 1% per trade, 36.3% at 2% and 85.0% at 3%.
- Is the risk of ruin zero if my strategy has an edge?
- No. An edge makes a deep drawdown less likely, not impossible, and over enough trades every drawdown size below a high eventually happens. What you control is how likely it is within the trades that matter to you - a challenge, a year, the time until you would give up.
- Why does a bigger risk per trade hurt so much?
- Because losses compound against you: at 1% it takes 23 losses in a row to lose 20%, at 3% only 8. Fewer losses are needed, and short streaks are far more common than long ones.