Risk of ruin
Risk of ruin is the probability of losing your whole account, or a set share of it, given your strategy and risk size. It rises sharply when risk per trade is large.
How it works
'Ruin' does not have to mean zero; it can be a drawdown after which you cannot or will not carry on, such as −50%. The probability depends on three things: win rate, the ratio of average win to average loss, and the percentage of the account you risk on each trade.
Even a strategy with positive expectancy has a non-zero risk of ruin, because losing streaks happen. At a 50% win rate, the chance of five losses in a row is about 3% and of ten about 0.1%, but over thousands of trades such a streak will almost certainly turn up somewhere. At 10% risk per trade, ten straight losses cut the account by about 65%; at 1% risk, by about 10%.
The exact formulas are unwieldy, so risk of ruin is usually estimated by simulation: you run thousands of random trade sequences with your numbers and see what share ends in ruin. The main lever you control is risk per trade.
Strategy: 40% win rate, wins of 2R, losses of 1R, positive expectancy. At 2% risk per trade, ten losses in a row (about a 0.6% chance in any given run of 10 trades) mean a drawdown of about 18%. At 20% risk the same streak leaves about 11% of the account, which is effectively ruin.
The mistake is believing a profitable strategy protects you from ruin and therefore risking 10–20% per trade. The strategy can be good and the account still hits zero on a bad streak. Keep risk per trade low enough to survive the worst streak you can expect.
Questions and answers
What is risk of ruin in simple terms?
It is the chance that you lose your whole account, or most of it, trading your strategy at your chosen risk.
How do you reduce risk of ruin?
Mainly by lowering the percentage you risk per trade. A strategy with positive expectancy and a daily loss limit also help.
Can a profitable strategy still blow up an account?
Yes, if risk per trade is too high. A long losing streak happens even to good systems, and with big risk it can wipe the account.
Related terms
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Updated: 2026-10-19