Risk of Ruin Calculator

About Risk of Ruin Calculator

Welcome to the Risk of Ruin Calculator, a powerful free online tool designed for traders and investors to calculate the statistical probability of losing their entire trading capital. By analyzing your win rate, payoff ratio (reward-to-risk), and position sizing, this calculator provides crucial insights into your trading system's sustainability and helps you optimize your risk management strategy.

What is Risk of Ruin in Trading?

Risk of Ruin (RoR) is the probability that a trader will lose their entire trading capital or reach a predefined maximum acceptable drawdown. It is one of the most important metrics for evaluating a trading system's long-term viability, yet many traders overlook it when developing their strategies.

Even traders with a positive expectancy (profitable edge) can go bankrupt if they risk too much per trade. Risk of Ruin quantifies this danger by calculating the exact probability of reaching zero based on your trading parameters. Understanding your RoR helps you balance the desire for returns against the very real possibility of losing everything.

Why Risk of Ruin Matters

Many traders focus solely on potential profits while ignoring the probability of catastrophic loss. Consider these scenarios:

• Trader A: 60% win rate, 1.5:1 payoff, risking 10% per trade = 25% chance of ruin
• Trader B: 60% win rate, 1.5:1 payoff, risking 2% per trade = 0.1% chance of ruin

Both traders have identical edge, but Trader A has a 250x higher probability of blowing their account due to oversized positions. This calculator helps you find the optimal balance between growth and survival.

The Risk of Ruin Formula

This calculator uses the standard Risk of Ruin formula for trading systems with asymmetric payoffs:

Where:

• Edge = (Win Rate × Payoff Ratio) - Loss Rate
• N = Capital Units = Total Capital / Risk Per Trade
• Win Rate = Probability of winning a trade (as decimal)
• Loss Rate = 1 - Win Rate
• Payoff Ratio = Average Win / Average Loss

Understanding Edge

Your trading edge represents your expected profit per unit of risk. The formula Edge = (Win Rate × Payoff Ratio) - Loss Rate calculates how much you expect to make for every dollar you risk.

For example, with a 55% win rate and 1.5:1 payoff ratio:

• Edge = (0.55 × 1.5) - 0.45 = 0.825 - 0.45 = 0.375
• This means you expect to earn $0.375 for every $1 risked

A positive edge is essential - without it, your Risk of Ruin is always 100% in the long run.

Risk Level Guidelines

Professional traders and risk managers use the following Risk of Ruin thresholds:

How to Use This Calculator

1. Enter your win rate: Input your trading system's historical win rate as a percentage. Be honest and use verified data from backtesting or live trading.
2. Set your payoff ratio: Enter your average reward-to-risk ratio. If your average winner is $300 and average loser is $200, your payoff ratio is 1.5.
3. Define risk per trade: Specify what percentage of your capital you risk on each trade. Most professionals risk 0.5% to 2% per trade.
4. Set drawdown limit (optional): Optionally specify a maximum drawdown level. Setting 50% calculates the probability of losing half your capital.
5. Analyze results: Review the risk gauge, statistics, and sensitivity charts to understand your trading system's risk profile.

Understanding Your Results

Risk Gauge

The visual gauge provides an immediate assessment of your Risk of Ruin. Green indicates safe levels, yellow suggests caution, and red signals dangerous territory requiring immediate attention.

Key Statistics

• Risk of Ruin: Your probability of losing all capital (or hitting your drawdown limit)
• Survival Rate: The probability of NOT going broke (100% - RoR)
• Edge: Your expected return per unit of risk
• Expectancy: Average profit per trade as a multiple of your risk
• Kelly Criterion: The mathematically optimal position size for maximum growth
• Break-Even Win Rate: The minimum win rate needed to break even at your payoff ratio

Sensitivity Charts

The interactive charts show how changing each parameter affects your Risk of Ruin:

• Win Rate Sensitivity: Shows how RoR changes as win rate varies
• Risk Per Trade Impact: Demonstrates the dramatic effect of position sizing
• Payoff Ratio Analysis: Reveals how improving your reward-to-risk affects survival

The Kelly Criterion and Position Sizing

The Kelly Criterion is a formula that calculates the optimal position size to maximize long-term portfolio growth:

While Kelly maximizes growth, it can result in large drawdowns. Most traders use fractional Kelly (25-50% of the calculated value) to reduce volatility while still capturing most of the growth potential.

Kelly vs Risk of Ruin Trade-off

• Full Kelly: Maximum growth but high volatility and larger drawdowns
• Half Kelly: 75% of maximum growth with significantly reduced risk
• Quarter Kelly: 50% of maximum growth with very low risk of ruin

Practical Risk Management Strategies

1. Position Sizing Rules

• Never risk more than 2% of capital on a single trade
• Consider 0.5-1% risk for newer traders or volatile markets
• Reduce position size during drawdowns to preserve capital

2. Improving Your Edge

• Focus on setups with higher probability of success
• Use stop losses that optimize your payoff ratio
• Let winners run while cutting losers quickly
• Trade only when your edge conditions are present

3. Drawdown Management

• Set a maximum drawdown limit (e.g., 20-25%)
• Reduce position size after consecutive losses
• Take breaks during losing streaks to prevent tilt
• Review and adjust strategy if drawdown limits are approached

Frequently Asked Questions

What is Risk of Ruin in trading?

Risk of Ruin (RoR) is the probability that a trader will lose their entire trading capital or reach a predefined maximum drawdown. It is a statistical measure that considers win rate, payoff ratio (reward-to-risk), and position sizing to determine the likelihood of account bankruptcy. Understanding RoR helps traders manage position sizes and develop sustainable trading strategies.

How is Risk of Ruin calculated?

Risk of Ruin is calculated using the formula: RoR = ((1 - Edge) / (1 + Edge))^N, where Edge = (Win Rate × Payoff Ratio) - Loss Rate, and N = Capital Units (total capital divided by risk per trade). This formula assumes consistent position sizing and independent trade outcomes. A positive edge is required for a finite probability of survival.

What is a good Risk of Ruin percentage?

Professional traders typically aim for a Risk of Ruin below 1-5%. A RoR under 1% is considered excellent risk management, 1-5% is good, 5-15% is moderate but should be monitored, 15-30% is high risk, and above 30% indicates a significant danger of losing your trading capital. Lower RoR percentages require either a higher edge, smaller position sizes, or both.

How does position size affect Risk of Ruin?

Position size has a dramatic impact on Risk of Ruin. Risking 1% per trade versus 5% per trade can mean the difference between a 0.1% and 50% chance of ruin with the same edge. Smaller position sizes exponentially decrease your risk of ruin because they provide more trading opportunities before potential bankruptcy. This is why professional traders often risk only 0.5-2% per trade.

What is the Kelly Criterion and how does it relate to Risk of Ruin?

The Kelly Criterion is a formula that determines the optimal bet size to maximize long-term growth rate: Kelly% = (Win Rate × Payoff Ratio - Loss Rate) / Payoff Ratio. While full Kelly maximizes growth, it can result in large drawdowns. Most traders use fractional Kelly (25-50% of the calculated value) to reduce volatility and Risk of Ruin while still capturing most of the growth potential.

Can I have a positive expectancy but still go broke?

Yes, absolutely. This is one of the most important lessons in trading risk management. Even with a positive edge, oversized positions can lead to ruin before your edge has time to play out. The variance in trading outcomes can wipe out an account if position sizes are too large, even when the long-term expectation is positive. Risk of Ruin calculations help quantify this danger.

How do I reduce my Risk of Ruin?

There are three main ways to reduce Risk of Ruin: (1) Decrease position size - this has the most dramatic effect; (2) Increase win rate through better trade selection; (3) Improve payoff ratio by letting winners run and cutting losers. Of these, reducing position size is the fastest and most reliable way to lower RoR, as improving your trading edge takes time and may not always be possible.

Additional Resources

To learn more about Risk of Ruin and trading risk management:

• Risk of Ruin - Wikipedia
• Kelly Criterion - Wikipedia
• Understanding Ruin Probability - Investopedia