Risk of Ruin Calculator
Calculate the probability of losing your entire trading account based on your win rate, average win/loss, and risk per trade. Essential for understanding if your strategy is sustainable.
Enter your trading statistics, then click Calculate risk of ruin to see the probability of account ruin.
For educational purposes only. Not financial advice. Read full disclaimer
Risk of Ruin Formula
RoR = exp( -2 × Edge × Units / Variance )
Where Edge = (WinRate × R:R) - LossRate, the expected R per trade · Variance = (WinRate × R:R²) + LossRate - Edge², the variance of R per trade · Units = Account / Risk. One R is one unit of risk: a win returns +R, a loss returns -1.
Why this formula and not the common one. Most risk-of-ruin calculators use ((1 - Edge) / (1 + Edge)) ^ Units. That is the classical even-money gambler's-ruin result and it is only valid at 1:1 reward:risk. Above 1:1 it understates ruin, and in the dangerous direction — at a 35% win rate, 2:1 reward:risk and 50 units it reports 0.67% against a true ~8.4% measured by simulation. The error is largest for the low-win-rate, high-reward:risk profile that trend and breakout traders typically run. This calculator uses the diffusion approximation instead, which tracks simulation across the realistic input range and errs conservative above 1:1 — the regime where the classic form breaks down. At exactly 1:1 the classic form is exact and this approximation reads marginally low, a difference of thousandths of a percentage point at normal position sizes.
Worked Examples
Example 1: Positive edge with conservative risk
You have a 55% win rate, an average win of $150, an average loss of $100, a $10,000 account, and you risk $200 per trade.
- Reward:Risk = $150 / $100 = 1.50:1
- Edge = (55% × 1.50) - 45% = 82.5% - 45% = +37.50%
- Expectancy = (0.55 × $150) - (0.45 × $100) = $37.50 per trade
- Units to Ruin = $10,000 / $200 = 50 consecutive losses
- Variance = (0.55 × 1.50²) + 0.45 - 0.375² = 1.2375 + 0.45 - 0.1406 = 1.5469
- Risk of Ruin = exp(-2 × 0.375 × 50 / 1.5469) = exp(-24.24) = <0.01% (effectively zero)
Example 2: Negative edge with aggressive risk
You have a 45% win rate, an average win of $120, an average loss of $100, a $5,000 account, and you risk $500 per trade.
- Reward:Risk = $120 / $100 = 1.20:1
- Edge = (45% × 1.20) - 55% = 54% - 55% = -1.00%
- Expectancy = (0.45 × $120) - (0.55 × $100) = -$1.00 per trade
- Units to Ruin = $5,000 / $500 = 10 consecutive losses
- Break-even win rate = 1 / (1 + 1.20) = 45.5%
- Risk of Ruin = 100% (negative edge guarantees eventual ruin)
Example 3: Positive edge that still carries real ruin risk
A trend-following profile: a 35% win rate, an average win of $200, an average loss of $100, a $10,000 account, risking $200 (2%) per trade. This is the case where the common formula misleads.
- Reward:Risk = $200 / $100 = 2.00:1
- Edge = (35% × 2.00) - 65% = 70% - 65% = +5.00%
- Expectancy = (0.35 × $200) - (0.65 × $100) = $5.00 per trade
- Units to Ruin = $10,000 / $200 = 50 consecutive losses
- Variance = (0.35 × 2.00²) + 0.65 - 0.05² = 1.40 + 0.65 - 0.0025 = 2.0475
- Risk of Ruin = exp(-2 × 0.05 × 50 / 2.0475) = exp(-2.442) = 8.70% (Moderate)
The system is genuinely profitable and the account still has roughly a 1-in-11 chance of being wiped out. The common even-money formula returns 0.67% here — a “Low” reading roughly 13× too optimistic. If you have used another risk-of-ruin calculator and it told you a low-win-rate, high-reward:risk system was safe, this is why the numbers disagree.
How to Use This Calculator
- Enter your win rate — the percentage of trades that are winners. Review your trade journal or backtest results for an accurate number.
- Enter your average win — the average dollar amount you make on winning trades.
- Enter your average loss — the average dollar amount you lose on losing trades. This should be a positive number.
- Enter your account size — the total capital in your trading account.
- Enter your risk per trade — the fixed dollar amount you risk on each trade. Most traders risk 1-2% of their account.
- Click Calculate — the calculator returns your risk of ruin percentage, edge, expectancy, reward-to-risk ratio, and units to ruin.
Frequently Asked Questions
- What is an acceptable risk of ruin?
- Most professional traders aim for a risk of ruin below 5%. Under 1% is considered excellent. If your risk of ruin exceeds 15%, your strategy or position sizing needs adjustment before trading with real capital.
- How does win rate affect ruin probability?
- Win rate alone does not determine risk of ruin — it works in combination with your reward-to-risk ratio. A 40% win rate with a 3:1 reward-to-risk ratio can have a lower risk of ruin than a 60% win rate with a 0.8:1 ratio. What matters is whether your overall edge is positive.
- What does "units to ruin" mean?
- Units to ruin is the number of consecutive maximum losses it would take to completely deplete your account. It equals your account size divided by your risk per trade. More units means a larger buffer against ruin — 50 or more units is generally considered safe.
- Why does the calculator show 100% risk of ruin?
- A 100% risk of ruin means your edge is zero or negative. When your expected value per trade is not positive, mathematical models predict eventual account depletion regardless of account size. To fix this, increase your win rate above the break-even threshold or improve your reward-to-risk ratio.
- How can I lower my risk of ruin?
- There are three levers: reduce your risk per trade (increases units to ruin), improve your win rate (increases edge), or improve your reward-to-risk ratio (increases edge). Reducing risk per trade is usually the fastest fix — going from 5% to 2% of your account per trade can dramatically lower ruin probability.
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