Risk of ruin is the probability that an account reaches a specified loss threshold before a chosen horizon ends. The threshold might be zero, a minimum balance needed to keep trading, or a drawdown limit set by the trader. A useful estimate needs a model of returns, position size, trading costs, and the time period.
Inputs Behind an Estimate
A risk of ruin model depends on more than a win rate. The model needs the size of gains and losses, the sequence of trades, the amount risked, and the relationship between trades. Fees, funding payments, slippage, gaps, and changing volatility can shift the outcome. A model built from independent trades can understate risk when losses cluster.
A Drawdown Example
Suppose a trader starts with $1,000 and loses 2% of the current balance on each trade. After ten consecutive losses, the balance is about $817 because $1,000 × 0.98¹⁰ = $817. The trader has lost about 18.3% of the starting balance. This calculation shows the effect of a losing sequence. It does not estimate the chance of that sequence.
To estimate that chance, the trader would need a supported probability model for losses and a defined number of trades. A win-rate estimate alone does not supply those inputs, and past results do not fix future odds.
Limits of the Metric
Risk of ruin changes when a trader changes position size, stops trading, adds capital, or changes the ruin threshold. A backtest can inform an estimate, but it cannot prove future performance. Traders should test several assumptions and include costs before using a result to set a risk limit.
Position size and drawdown connect this calculation to account risk. See Position Sizing, Drawdown, Expectancy, and the Position Size Calculator guide.