Risk of Ruin
The probability that a series of losses reduces an account below the point of recovery.
Also called: ruin · blowing up
Written by Javier Sánchez Ros
In plain language
Risk of ruin combines win rate, risk/reward and position size into a single probability: the chance of losing so much that continuing is not realistic.
The dominant variable is position size. A positive-expectancy strategy risking 25% per trade still has a meaningful chance of ruin; the same strategy at 1% is effectively safe from it.
Losing streaks are longer than intuition suggests. With a 40% win rate, a run of eight consecutive losses is entirely ordinary over a few hundred trades.
Worked through
A coin flip that pays 2:1 — and still ends at zero
The bet is excellent: heads doubles your stake, tails loses it, and the coin is fair. Any sensible analysis says take it repeatedly. Now bet the entire account on every flip.
The expectancy is strongly positive and the outcome is certain. Not likely — certain. Somewhere in the sequence a tail comes up, the balance is zero, and zero multiplied by every favourable flip that follows is still zero. There is no recovery from ruin, which is what separates it from an ordinary loss.
This is the case for fractional sizing stated at its starkest. Risk a fixed small part of what remains and the account can absorb any streak, because each bet is smaller than the last after a loss. Risk all of it and a positive edge guarantees ruin rather than preventing it.
Real accounts rarely reach literal zero. They reach a balance too small to trade meaningfully, or a trader too shaken to continue, which is the same outcome by a different route. That is why survival is not one goal among several — it is the condition on which all the others depend.
Why it matters
Survival is the precondition for every other outcome. A strategy that works but occasionally destroys the account has an expected long-run value of zero.
Common mistakes
- Assuming a positive edge makes ruin impossible.
- Underestimating the length of a normal losing streak.
- Sizing for the best case rather than for the worst plausible sequence.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The fixed share of your account you are willing to lose on any single trade.
The decline from an account’s peak value to its lowest point before a new peak.
The average amount you expect to win or lose per trade over a large sample.
The largest peak-to-trough decline an account or strategy has ever experienced.
The amount of an asset you buy or sell in a single trade.