What it means
Risk of ruin is the mathematical probability that your account equity will reach a 'ruin' threshold (typically 50% drawdown or zero) over a long sequence of trades, given fixed win rate, payoff, and position size. Formula depends on these parameters; the higher the position size and the closer to negative expectancy, the higher the risk of ruin. For positive-expectancy systems with reasonable sizing, risk of ruin should be <1%.
Why it matters
Risk of ruin quantifies survival. A system with +0.3R expectancy and 1% per trade has near-zero ruin probability over thousands of trades. The same system with 5% per trade has ~10% ruin probability. Sizing is the dominant determinant — sized too aggressively, even profitable systems can ruin via bad luck early in the sequence.
How to use it
Use online risk-of-ruin calculators with your system stats. Target ruin probability <1% (some traders use <0.1%). If yours is higher, reduce position size until acceptable. Risk of ruin spikes nonlinearly with position size — going from 1% to 2% per trade can 5-10x ruin probability for marginal systems.
Want a worked example or a deeper dive? Ask Rocky how this concept applies to your specific watchlist or trade idea.
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