Risk of Ruin

1. What is Risk of Ruin

Risk of Ruin (RoR) is the probability the account falls to a level where you can't (or shouldn't) keep trading — plainly, the probability of "blowing up". "Ruin" isn't necessarily zero; it can be a threshold you define (e.g. lose 50% and the game is over).

It's the probabilistic view of all risk management: it combines win rate, RR, and risk per trade to answer "playing this way, what's my chance of ruin?"

2. Why it matters

• It turns the separate pieces (win rate, RR, risk %) into one life-or-death probability. A positive-expectancy strategy can still blow up if risk per trade is too big and a bad streak hits.
• RoR shows why "small risk per trade" isn't timidity — it's the condition that drives ruin probability toward near zero.

3. What affects it

It depends on three things, all under your control:

• Win rate — winning more often lowers RoR.
• Risk/Reward — each win bigger than each loss lowers RoR.
• Risk per trade (%) — the strongest lever: smaller risk per trade drops RoR fast.

4. How to apply

• No need to memorize a complex formula; grasp the qualitative relationship: cutting risk % per trade is the fastest way to push RoR near zero.
• Use RoR as a "health check": if ruin probability is still material at your current numbers, either cut risk per trade or improve win rate/RR before sizing up.
• Related to the Kelly Criterion — a formula for the "optimal bet fraction" from win rate and RR. In practice most use a "fractional Kelly" (half or less) to cut volatility, since full Kelly implies huge drawdowns.

5. Worked example (qualitative)

Same strategy (win rate 50%, RR 1:1):

• Risk 2% per trade → very low ruin probability long-term.
• Risk 25% per trade → a short bad streak blows up; RoR spikes.

→ Same strategy, only the risk % changed, and the account's fate is entirely different. That's the core message of all risk management.

6. Common mistakes

• Assuming "a profitable strategy can't blow up" — false; too-big risk per trade blows up despite positive expectancy.
• Using full Kelly — theoretically optimal growth but brutal drawdowns most can't stomach.
• Ignoring losing streaks — they run longer than intuition suggests; plan for the bad case.

7. FAQ

• How do I get RoR near zero? Keep risk per trade small (1-2%), keep win rate and RR good enough for positive expectancy, and avoid piling on correlated trades.
• Should I use the Kelly Criterion? Understand it to know the ceiling, but trade a fractional Kelly (e.g. 1/2) to cut drawdown.
• How is RoR different from drawdown? Drawdown is a decline usually recoverable; RoR is the probability of falling to an unrecoverable level.

8. Tools

• _(Coming)_ Risk of Ruin calculator: enter win rate, RR, risk % → estimate ruin probability.

9. Checklist

• ☐ Do I know my three numbers: win rate, RR, risk %/trade?
• ☐ At those numbers, is ruin probability acceptable?
• ☐ Have I used the strongest lever (cutting risk %) to lower RoR?