Risk of Ruin Calculator for Trading

Risk of ruin quantifies the probability your trading account reaches an unacceptable loss level—typically defined as a drawdown percentage that would force you to stop trading (e.g., -30%, -40%, or -50% from starting capital).

This concept comes from gambling mathematics but applies directly to trading: even strategies with positive expectancy (expected profit per trade > 0) can fail if position sizing is too aggressive relative to edge and capital.

Why it matters:

Capital survival is the prerequisite for long-term compounding. A strategy might be profitable "on average" over thousands of trades, but if your position sizing creates a 20% probability of hitting a 40% drawdown in the first 100 trades, you may not survive long enough to realize that edge.

The counterintuitive reality:

Doubling your position size doesn't double your risk of ruin—it increases it exponentially. A trader with a modest edge (52% win rate, 1.1:1 payoff) risking 2% per trade might have ~7% risk of ruin. The same trader risking 4% per trade might have ~30% risk of ruin—a 4x increase in risk from doubling position size.

Real-world example:

In 2008, many quantitative hedge funds had positive backtested expectancy but failed because they underestimated tail risk (position sizing relative to extreme market conditions). Risk of ruin calculations based on "normal" market assumptions didn't account for correlation breakdowns and liquidity crises.

The lesson: Use risk of ruin as a conservative baseline, then stress-test with Monte Carlo simulations that account for real market conditions.

Many risk calculators use "risk of ruin" and "risk of drawdown" interchangeably, creating confusion. Here's the technical distinction:

Risk of drawdown: Probability of experiencing a peak-to-valley equity decline of X% at any point during N trades.

Risk of ruin (this calculator's definition): Probability of experiencing a loss of X% from your starting capital, reaching your predetermined "stop-out level."

Example to illustrate the difference:

Starting capital: $10,000
Stop-out level: -30% (= $7,000)

• Drawdown scenario: Account grows to $12,000, then drops to $8,400 (30% drawdown from peak). You continue trading.
• Ruin scenario: Account drops from $10,000 to $7,000 (30% loss from start). You stop trading or face forced liquidation.

Why both matter:

Risk of drawdown measures psychological pain and recovery difficulty (drawdowns are temporary but can last months or years).

Risk of ruin measures survival probability—once you hit your stop-out level, the strategy is over (forced liquidation, account closed, or emotional capital exhausted).

This calculator calculates: Risk of hitting your loss level from starting equity (ruin), not peak-to-valley drawdown.

One of the most dangerous misconceptions in trading: "My strategy has positive expectancy, so I can't lose long-term."

The flaw in this thinking:

Positive expectancy means your average profit per trade is positive. But "average" is meaningless if you don't survive to reach it.

Real example:

Same strategy, drastically different survival probability—only variable is position sizing.

Why this happens:

Losing streaks happen. With a 55% win rate, you'll experience 5+ consecutive losses multiple times per year. At 10% risk per trade, a 5-trade losing streak = -41% drawdown (compounding). At 1% risk per trade, same streak = -4.9% drawdown.

The math is unforgiving: aggressive sizing means a statistically normal losing streak becomes catastrophic.

The "rebound" fallacy:

Some traders believe they'll recover after hitting drawdown. But recovering from -50% requires +100% gains. Recovering from -70% requires +233% gains. Large drawdowns create nearly insurmountable holes.

Bottom line: Position sizing determines whether your edge translates into sustained profits or brief success followed by account failure. Use the calculator below to find the maximum risk per trade that keeps your risk of ruin acceptably low (typically <5%).

The classic risk of ruin formula for fixed fractional position sizing:

Example calculation:

Strategy: 50% win rate, 2:1 payoff (avg win = 2R, avg loss = 1R)

• Edge = (0.50 × 2) - (0.50 × 1) = 0.50
• Capital Units = 100 (risking 1% per trade = 100 units of risk)
• RoR = ((1 - 0.50) / (1 + 0.50))^100 = 0.33^100 ≈ 0.0000000001%

This suggests near-zero risk of ruin. But here's the problem:

The Balsara Risk of Ruin Tables

Nauzer Balsara's "Money Management Strategies for Futures Traders" (1992) popularized risk of ruin analysis among traders. Balsara's tables show the probability of losing a fixed percentage of capital based on win rate, payoff ratio, and risk per trade.

Professional traders target risk of ruin below 5%. Balsara's research demonstrated that even strategies with positive expectancy face significant ruin probability when position sizing exceeds 3-5% per trade.

Source: Balsara, N. (1992). Money Management Strategies for Futures Traders. Wiley.

Where the formula breaks down:

Why Monte Carlo is better:

This calculator uses Monte Carlo simulation (10,000+ runs) instead of the closed-form formula. Monte Carlo can account for:

• Finite trade horizons (not infinite time)
• Trade sequence effects (order matters)
• More realistic assumptions about market behavior

But even Monte Carlo relies on your inputs (win rate, payoff) being accurate. The best approach: Calculate RoR from your actual historical trades, not estimated parameters.

This calculator provides useful estimates, but like all models, it makes simplifying assumptions that don't always hold in real trading:

When the calculator is most accurate:

• Large sample sizes (1,000+ trades)
• Stable market conditions
• Systematic (automated) execution
• Conservative position sizing (<2% risk per trade)

When to be skeptical:

• Small sample sizes (<100 trades)
• Estimated (not actual) win rate/payoff inputs
• Aggressive sizing (>3% risk per trade)
• Manual execution with psychological factors

Better alternative: Calculate RoR from your actual trade history using Monte Carlo simulation—not theoretical parameters.

If your risk of ruin calculation is higher than your tolerance (typically >5%), here are your options—ranked from most to least impactful:

This calculator uses theoretical averages (win rate, payoff ratio) to estimate risk of ruin. But there's a more accurate approach: stress-testing your actual trade sequence with Monte Carlo simulations.

Why averages can mislead:

Two strategies with identical win rate and payoff can have vastly different risk profiles based on trade sequence:

• Strategy A: Wins and losses randomly distributed
• Strategy B: Wins cluster early, losses cluster late

Both have the same theoretical RoR. But Strategy B is far more dangerous—if you start trading during a losing period, you may hit your stop-out level before seeing any wins.

How most traders estimate RoR:

BacktestBase approach: TradingView → Monte Carlo with Optional RoR Tracking

BacktestBase was built specifically for post-backtest validation of TradingView strategies. Here's the workflow:

When to use each approach:

Use this calculator to learn the concept. Use BacktestBase to validate before risking real money.