Risk of ruin is the probability that a trader loses so much of their account that they can no longer carry on trading their plan. It depends on three things: your edge, how much you risk on each trade and how big a loss you count as ruin. Of the three, risk per trade is the one you fully control, and it matters more than most beginners expect.
Quick answer: what is risk of ruin?
It is the chance that a run of losses takes your account down to a level you have defined as ruin, such as half your starting balance. A method with an edge can still carry a high chance of ruin if each trade risks too much, while a method with no edge is ruined eventually, however small the stake.
What “ruin” actually means
Ruin rarely means a balance of exactly zero. For most traders it is the point where they stop: a 50% loss that would need a 100% gain to recover, a prop-firm drawdown limit, or simply the level at which they lose the nerve to follow their rules.
On a leveraged account the broker can decide for you. Under ESMA’s product intervention measures on CFDs, providers close out a retail client’s open positions once the account falls to 50% of the minimum required margin. CFDs and spread bets magnify losses as well as gains, so a sharp move can force positions closed long before your own ruin level.
The risk of ruin formula, in its simplest form
The maths comes from the classic gambler’s ruin problem, which MIT’s introductory probability course works through. In its simplest trading form, it assumes wins and losses are the same size and you risk the same fixed amount on every trade.
Under those assumptions, the formula is (q ÷ p) to the power of N, where:
- p is your win rate, for example 0.55 for 55%
- q is your loss rate, so 1 minus p
- N is the number of risk units between your balance and your ruin level
Two results follow straight away. If p is 0.5 or lower, q ÷ p is 1 or more, and ruin is certain given enough trades. If you have an edge, every extra risk unit you can afford to lose shrinks the probability sharply, because the number is raised to a higher power.
Worked example: the same method at four risk levels
Example, using hypothetical figures. A trader has a £5,000 account and defines ruin as losing £2,500. Their method wins 55% of the time, wins and losses are the same size, there are no costs and every trade is independent. Only the fixed amount risked per trade changes.
| Risk per trade | Losses until ruin (N) | Chance of ruin |
|---|---|---|
| £50 (1%) | 50 | About 0.004% |
| £100 (2%) | 25 | About 0.7% |
| £250 (5%) | 10 | About 13% |
| £500 (10%) | 5 | About 37% |
For the last row: 0.45 ÷ 0.55 is about 0.818, and 0.818 to the power of 5 is about 0.37. The method is identical in every row, yet at £500 a trade it has more than a one-in-three chance of halving the account. That is why our guide on how much to risk per trade starts from small numbers.
Fixed-percentage risk: smaller bets as you lose
Most traders risk a fixed percentage of the current balance rather than a fixed amount. Each loss makes the next stake smaller, so in theory the balance never reaches zero. It can still reach your ruin level, though, and the table shows how many straight losses it takes to halve the account.
| Risk per trade | Losses in a row to lose 50% |
|---|---|
| 1% | 69 |
| 5% | 14 |
| 10% | 7 |
Seven losses in a row is ordinary for most methods, and real drawdowns mix losses with wins, so the account can get there by a longer road too. Our guide to handling a trading drawdown and losing streak covers what to do while it happens, and how to calculate position size from your risk turns the percentage into a trade size.
Using a risk of ruin calculator
Online calculators are handy once your wins and losses are different sizes, because the simple formula no longer applies. Most use an approximation or run thousands of simulated trade sequences, often called Monte Carlo simulation. Before trusting one, check what it assumes.
- Definition of ruin. Zero, a set drawdown or a prop-firm limit give very different answers.
- Your edge. The output is only as good as the win rate and average win and loss you enter, ideally from a backtest that does not fool you and a live journal.
- Sizing. Fixed amount or fixed percentage changes the result.
- Costs. Spreads turn a small edge into a smaller one; see the bid and ask spread and what it costs.
What the model leaves out
Every figure here assumes a fixed win rate and independent trades. Real markets change character, a run of trades in related markets can lose together, and slippage on fast moves makes some losses bigger than planned.
The biggest gap is behaviour. The maths assumes you keep the same size after five losses, but many traders raise it to win money back, which is how low odds of ruin become high ones. Tracking your actual risk per trade in a simple trading journal shows whether you stay within the numbers.
Edge also matters as much as size. A higher win rate is not the only route to an edge; win rate versus risk to reward explains how a lower win rate with bigger winners can work. Measuring that edge is covered in our guide to expectancy in trading.
Common mistakes when judging the odds of ruin
- Treating a good win rate as protection. Size can ruin a winning method, as the table shows.
- Using backtest numbers as if they were certain. Your true win rate is an estimate, so leave a margin.
- Ignoring leverage. Margin close-out can end a trade before your stop is reached. Our guide to margin and leverage for beginners explains how.
- Raising risk after losses. It cuts the number of units between you and ruin at the worst time.
Frequently asked questions
What is an acceptable risk of ruin?
There is no official figure, and the answer depends on your ruin level and how much you trust your edge estimate. Many traders aim to keep it close to zero, which in practice means small risk per trade.
Does risking 1% per trade make ruin impossible?
No. It makes ruin much less likely for a method with an edge, but a method with no edge is still ruined eventually, and costs or poor execution can remove a small edge.
Is risk of ruin the same as maximum drawdown?
No. Maximum drawdown is the deepest fall that has happened, while ruin risk is the probability of a fall reaching a level you define in the future.
Next steps
The danger of ruin is the reason a written risk model comes before any strategy. Our guide to building a rules-based risk model shows how risk per trade, stops and drawdown rules fit together.
Building a rules-based risk model and assessing whether a trade is worth the risk are both covered in our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
