How likely is your account to hit zero (or an unacceptable drawdown) before your edge plays out? Use these rules and tables to keep Ruin risk near 0%.
Risk of Ruin (RoR) is the probability that a trading strategy eventually loses enough capital to make recovery practically impossible. You can define "ruin" as hitting $0 or a threshold like -50% or -30%.
For independent trades with win probability p and loss probability q = 1 - p, edge per trade e, and fixed fraction f of capital risked per trade, RoR drops as p, e increase and rises with f. A practical approach: keep f small and verify with Monte Carlo.
| Win Rate | R:R | Risk Per Trade |
|---|---|---|
| 40-50% | 2:1 | 0.5-1.0% |
| 50-60% | 1.5:1 - 2:1 | 1.0-1.5% |
| 60-70% | 1:1 - 1.5:1 | 1.5-2.0% |
| <40% | >= 3:1 | 0.25-0.5% |
| Risk Per Trade | Losses to -50% | Losses to -30% |
|---|---|---|
| 0.5% | 139 | 69 |
| 1.0% | 69 | 35 |
| 2.0% | 35 | 18 |
| 5.0% | 14 | 7 |
Exact formulas exist for certain assumptions, but real trading violates independence, equal bet sizing, and constant edge. We recommend approximations plus Monte Carlo simulation to measure practical Ruin risk.
Full Kelly maximizes growth rate but creates large drawdowns and high short-term Ruin risk. Fractional Kelly (25-50%) retains most growth while significantly lowering Ruin probability.
Practical Ruin is hitting a drawdown where you stop trading or cannot recover (e.g., -50%). Define a threshold that would force you to stop, and size to keep the probability near 0%.