Trading realityUpdated 2 min readBy the FXNOD team
Risk of ruin: the chance of losing your whole account
Risk of ruin is the probability that a trader loses their entire account before it grows. It depends on two things: the edge per trade and the fraction of the account risked each time. With no edge, ruin is certain if you keep trading. With an edge, risking a smaller fraction per trade cuts the risk of ruin dramatically.
The simple formula
For even-money trades with a fixed stake, risk of ruin equals the fraction (1 minus edge) divided by (1 plus edge), raised to the power of the number of stakes in the account. The edge is the win rate minus the loss rate. With a 55% win rate the edge is 0.10, the fraction is 0.9 divided by 1.1, or 0.818, and the rest depends on how many stakes you hold.
What the numbers look like
| Win rate at even money | 10 stakes in the account | 20 stakes | 50 stakes | 100 stakes |
|---|---|---|---|---|
| 50% or less | 100% | 100% | 100% | 100% |
| 52% | 45% | 20% | 1.8% | 0.03% |
| 55% | 13% | 1.8% | Under 0.01% | Negligible |
| 60% | 1.7% | 0.03% | Negligible | Negligible |
Read the first row first. With no edge, the account is eventually lost however small the stake. Stake size decides how long that takes, not whether it happens.
The two levers
- Edge: a larger advantage per trade lowers the risk sharply. You control this only by having a real, tested method.
- Stake size: holding more stakes in the account, by risking less per trade, lowers it just as sharply. This one is entirely yours.
Why 1% risk matters
Risking 10% per trade gives you ten stakes. With a modest 52% edge, the table says ruin is close to a coin flip. Risking 1% gives a hundred stakes and makes it remote. The method is identical. Only the stake changed.
What the formula leaves out
- It assumes you know your true win rate. You have an estimate, usually an optimistic one.
- It assumes wins and losses of equal size.
- It assumes a fixed stake. Raising the stake after losses makes ruin far more likely than the table shows.
- It treats ruin as zero. Most traders stop long before, at a loss they can no longer tolerate.
On negative-expectation contracts
A contract with an even chance and a payout under double has a negative edge. The first row applies: with continued play the balance is eventually lost. A stop loss and a small stake control how much you spend in a session. They do not change the direction.
Questions people ask
- What is an acceptable risk of ruin?
- As close to zero as you can make it. Most serious traders aim for well under 1%.
- How do I reduce my risk of ruin?
- Risk a smaller fraction per trade. It is the one lever fully under your control.
- Does Martingale reduce risk of ruin?
- No. It raises it, by increasing the stake during losing streaks.
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