TL;DR
Risk of ruin is the probability that a trading strategy eventually loses an entire account given its win rate and position size; a 55% win-rate strategy risking 2% per trade carries a risk of ruin under 0.01%, but the same edge at 10% risk per trade jumps to roughly 13%, meaning position size, not win rate, is usually what determines survival.
Key Takeaways
- 1.Risk of ruin (RoR) is calculated from two inputs: your win rate and the percentage of capital risked per trade, assuming roughly even win/loss sizes.
- 2.A trader with exactly a 50% win rate and no edge has a mathematical risk of ruin approaching 100% over enough trades, even with disciplined sizing.
- 3.Cutting risk per trade from 10% to 2% at a fixed 55% win rate drops modeled risk of ruin from about 13% to under 0.01%.
- 4.The classic risk of ruin formula comes from gambler's ruin probability theory, formalized for trading by Ralph Vince in his 1990 book Portfolio Management Formulas.
- 5.Risk of ruin calculators are a sizing sanity check, not a guarantee; real markets don't have fixed win rates or perfectly equal win/loss sizes trade to trade.
A risk of ruin calculator estimates the probability that a trading strategy eventually loses its entire account, based only on win rate and how much capital is risked per trade. The number is a warning signal, not a prediction: a strategy can show a 0% modeled risk of ruin and still lose money slowly through fees, slippage, or a shifting win rate the formula never sees.
The formula itself dates back further than retail trading software. It's a version of the gambler's ruin problem, first formalized mathematically in probability theory and later adapted for trading position sizing by Ralph Vince in his 1990 book Portfolio Management Formulas, which is still the most commonly cited source for this exact calculation in trading risk-management writing today.
What is risk of ruin in trading?
Risk of ruin in trading is the calculated probability, expressed as a percentage, that a series of trades at a given win rate and position size eventually reduces an account to zero (or to a defined ruin threshold) before it reaches a target. It answers a narrower question than most traders think it does: not 'will I make money' but 'given infinite trades at this exact win rate and size, how likely am I to go broke first.'
The two inputs that matter are win rate and risk per trade as a percentage of capital. A strategy with a small edge and small position size can have a near-zero risk of ruin, while the same edge at a large position size can carry double-digit ruin odds, which is the core insight most new traders miss when they focus only on win rate.
The risk of ruin formula, explained
The simplified version of the formula, assuming roughly equal win and loss sizes (a 1:1 payoff), is: Risk of Ruin = ((1 - Edge) / (1 + Edge)) raised to the power of N, where Edge equals (2 times win rate minus 1), and N equals 100 divided by the risk percentage per trade.
How to calculate risk of ruin by hand
- 1
Find your edge
Edge = (2 x win rate) - 1. A 55% win rate gives an edge of 0.10; a 60% win rate gives an edge of 0.20.
- 2
Find your capital units
N = 100 / risk per trade (as a percent). Risking 2% per trade gives N = 50; risking 10% per trade gives N = 10.
- 3
Compute the ratio
Ratio = (1 - Edge) / (1 + Edge). At a 10% edge, that's 0.9 / 1.1 = 0.818.
- 4
Raise the ratio to the Nth power
Risk of Ruin = Ratio ^ N. At a 0.818 ratio and N = 50, that's roughly 0.00004, or 0.004%.
- 5
Convert to a percentage and sanity-check it
Multiply by 100 to read it as a percent. If the number looks impossibly small (effectively 0%) or impossibly large (100%), double check whether your win rate is actually above or at breakeven first.
This assumes a 1:1 payoff
The formula above assumes wins and losses are roughly the same size. If your average win is meaningfully larger or smaller than your average loss, the simplified formula understates or overstates real risk, and a Monte Carlo simulation using your actual trade distribution is more accurate.
This exact formula, Risk of Ruin = ((1 - Edge) / (1 + Edge))^N, is the version most commonly taught in retail trading risk-management content because it only needs two inputs a trader already tracks: win rate and position size.
Risk of ruin by win rate and position size
Running the formula across a few realistic win rates and risk levels shows how much position size dominates the outcome compared to win rate alone. These figures are calculated directly from the formula above, not from live or historical trading results.
| Win rate | Risk per trade | Modeled risk of ruin |
|---|---|---|
| 50% (no edge) | 2% | ~100% |
| 55% | 10% | ~13.4% |
| 55% | 2% | <0.01% |
| 60% | 5% | ~0.03% |
| 65% | 10% | ~0.2% |
The 50% win-rate row is the one most traders find counterintuitive: with zero statistical edge, the model shows risk of ruin approaching 100% given enough trades, regardless of position size, since there's no positive drift to offset the variance. That single row is the classic gambler's ruin result, and it's the reason 'I win half my trades' is not, by itself, a survivable trading plan.
Why position size matters more than win rate
Compare the 55% win rate at two risk levels in the table above: dropping risk per trade from 10% to 2% takes modeled risk of ruin from about 13.4% down to under 0.01%, a reduction of roughly three orders of magnitude, while the win rate itself didn't move at all. That single variable, how much of the account is risked per trade, is doing almost all the work.
This is why professional risk management frameworks (fixed-fractional position sizing, the Kelly criterion, and simpler flat-percent rules) all converge on the same practical advice: keep risk per trade in the 1-2% range for strategies without a large, proven edge. It's not a conservative suggestion so much as a direct consequence of how fast the ruin formula grows once N (capital units) gets small.
- Calculate your actual win rate from at least 30-50 recorded trades, not a gut estimate
- Calculate your average risk per trade as a percentage of current account size, not a fixed dollar amount
- Run the risk of ruin formula using both numbers before increasing position size after a winning streak
- Re-run the calculation whenever your win rate shifts by more than a few percentage points across a new sample
- Treat a risk of ruin above 5% as a signal to cut position size, not to search for a higher win rate
A risk of ruin under 1% at your current win rate and size is generally considered a reasonable operating range by most position-sizing frameworks built on this formula, though the exact threshold is a personal risk tolerance decision, not a fixed rule.
Limits of the risk of ruin formula
The formula assumes a fixed win rate that holds indefinitely, which real trading strategies rarely do; market regimes shift, and a strategy's edge from the last 100 trades is not guaranteed to hold for the next 100. It also assumes independent trades with no correlation, which breaks down for traders holding multiple correlated positions (several tech stocks, for example) that can lose together in a single market move.
Correlated positions break the model
If five open positions are all correlated to the same market factor, a single adverse move can act like one oversized trade instead of five independent ones, which the basic risk of ruin formula does not account for.
The 1:1 payoff assumption is the other major simplification. Strategies with asymmetric payoffs (small frequent losses, occasional large wins, or the reverse) need a Monte Carlo simulation over the actual trade-size distribution to get an accurate ruin estimate rather than the closed-form formula used here.
Despite these limits, the closed-form formula remains useful precisely because it's fast: a trader can plug in two numbers and get a directional answer in seconds, which is enough to catch a position size that's dangerously large well before a full simulation would be worth building.
Risk of ruin versus other risk metrics
Risk of ruin answers a different question than the metrics most traders already track. A Sharpe ratio or Sortino ratio measures risk-adjusted return over a completed track record; risk of ruin instead projects forward from a win rate and position size to estimate the odds of total loss, which makes it more useful before or during a strategy's life than after it, when the historical ratios have more data to work with.
Maximum drawdown, another common metric, tells you the worst peak-to-trough decline a strategy has actually experienced, a backward-looking fact rather than a forward-looking probability. Risk of ruin and max drawdown are complementary: a strategy with a small historical max drawdown can still carry a high modeled risk of ruin if its win rate is thin and its position sizing is aggressive, since a short backtest window may simply not have hit the unlucky streak the formula accounts for mathematically.
Traders who track both tend to size positions more conservatively than those who look at max drawdown alone, since a clean historical drawdown chart says nothing about what a sequence of trades outside the sample period could do to the same account.
The verdict
A risk of ruin calculation is worth running any time you're deciding how much to risk per trade, especially after a winning streak tempts you to size up. The math is simple enough to do by hand with two inputs, win rate and risk per trade, and the output consistently shows the same pattern: cutting position size in half tends to cut modeled risk of ruin by far more than half, while doubling win rate at a fixed size produces a much smaller improvement.
Use the formula as a floor check, not a forecast. A strategy showing a 0.01% risk of ruin today can still lose money if its win rate drifts down next quarter, so pair this calculation with regular win-rate tracking rather than running it once and assuming the number holds forever. The single most reliable takeaway from the formula, across every version of it published since Vince's 1990 book, is that position size is the lever traders control directly, and win rate mostly isn't.
Keep reading
Get smarter trades, weekly
One short email every Sunday. AI workflows, tool reviews, and trader productivity tips.