Risk of ruin

Estimates the chance a bad run takes the whole account, from your win rate, payoff and risk. Use it when deciding position size.

Risk of ruin asks a blunt question. If you keep trading this edge at this size, what are the chances you lose everything before the edge has a chance to show itself? The answer depends on three things: how often you win, how much you win relative to what you lose, and how many losing trades your capital can absorb.

Payoff ratio is your average win divided by your average loss. Edge per unit risked combines it with your win rate into a single number. If that edge is positive, ruin is possible but bounded, and it falls very fast as you risk less per trade. If the edge is zero or negative, no amount of careful sizing saves you. Small risk only means the account takes longer to disappear. That is the single most important thing this card can tell you.

Risk units in capital is how many full losses your account could take before it is gone. At one percent per trade that is a hundred. At five percent it is twenty. The relationship between that number and the probability of ruin is not linear, it is exponential, which is why halving your risk per trade often cuts the risk of ruin by far more than half. Most of the safety in trading comes from this one lever.

Treat the output as an order of magnitude rather than a precise forecast. The formula assumes your win rate and payoff ratio stay constant, that trades are independent of one another, and that you keep risking the same fraction. Real markets break all three. Edges decay, losses cluster in bad regimes, and traders size up after wins. Every one of those makes the true risk higher than the number shown.

A practical reading: anything above a few percent deserves attention, and anything in double digits means the position size is doing more damage than the strategy is doing good. The fix is almost always to reduce risk per trade rather than to hunt for a better win rate.