By Marco BösingWhat Is Risk of Ruin?
Risk of ruin (RoR) refers to the statistical probability of losing all trading capital. It is one of the most important metrics in risk management and reveals whether a trading approach is viable in the long term.
The calculation is based on three variables: the win rate, the average risk-reward ratio, and the percentage of capital risked per trade. Even a system with a positive expectancy can have a high risk of ruin if position sizes are too aggressive.
Why Does Risk of Ruin Matter?
A trader can have a profitable strategy and still blow up their account — if they risk too much per trade. Risk of ruin makes this danger quantifiable:
- Very low risk per trade (e.g., 0.2%): Risk of ruin is effectively zero for profitable strategies
- Moderate risk per trade (e.g., 1–2%): Risk of ruin remains low with a good win rate and positive expectancy, but rises noticeably as edge decreases
- High risk per trade (5% or more): Risk of ruin increases dramatically — the exact figure depends on win rate and risk-reward ratio, but can become dangerous even for profitable systems
The exact values always depend on the interplay of all three variables (win rate, RRR, risk per trade). Blanket percentages without these inputs are misleading.
The core message: survival comes before profitability. Only those who avoid ruin can benefit from a positive expectancy over time.
Read the full article: Risk of Ruin Formula