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Risk of ruin

The probability that a series of losses reduces an account below the point where it can keep trading.

Risk of ruin against risk per tradeA curve climbing steeply as the share of the account risked on each trade grows, even though every trade carries a small positive edge.CHANCE OF LOSING THE ACCOUNT0%20%40%60%80%05%10%15%20%25%RISK PER TRADE (% OF ACCOUNT)2% → 1.8%5% → 20%10% → 45%20% → 67%assumes a 52% win rate at 1:1, ruin = account goneruin chance = (0.48 ÷ 0.52) ^ (100 ÷ risk %)
Risk of ruin. The chance of losing the whole account, plotted against the share of it staked on each trade, for a method that wins 52% of the time at even money. The edge is the same all along the curve; only the bet size changes.

Risk of ruin depends on win-rate, risk-reward-ratio, and how much of the account is risked per trade. With a positive expectancy and small risk per trade it approaches zero. With large risk per trade it can be near certain even for a profitable strategy.

This is the mathematical reason for 1% rules. Ruin is often defined not as zero but as a drawdown you would not continue through.

Example: a strategy with 50% win rate and 1:1 payoff risking 10% per trade has a very high chance of a 50% drawdown within a few hundred trades. The same strategy at 1% per trade almost never does.

Related: drawdown, risk-per-trade, kelly-criterion, expectancy

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