What is risk of ruin in trading?
In one line: Risk of ruin is the chance that losses shrink an account to a point where you can't, or won't, keep trading it.
The idea
Every trading method has losing streaks. Even a solid one. Risk of ruin asks: if a long streak comes, how much of the account is left?
"Ruin" doesn't have to mean zero. Many traders set their own line, like "down 30% and I stop to review."
A simple example: 10 losses in a row
Ten losses in a row sounds rare. Over hundreds of trades, it can happen. Here's what it does to an account at different risk levels per trade, each risk taken from the balance left:
| Risk per trade | Account left after 10 losses | Gain needed to get back |
|---|---|---|
| 1% | about 90% | about 11% |
| 5% | about 60% | about 67% |
| 10% | about 35% | about 186% |
At 1%, a bad streak is a dent. At 10%, the account needs to almost triple to recover. Check any number with the loss recovery calculator.
How long a streak should you expect? It depends on your Win rate and how many trades you take. The free losing streak calculator works it out.
Why it matters
You can't control when a streak comes. You can control how much each loss costs. That's why the size of your risk per trade matters more than any single entry.
Small, fixed risk keeps you in the game long enough for your method to show what it really does. More in how much to risk per trade.
A common mistake
Raising risk after losses to "win it back." That's the fastest way up the table above. Bigger size during a streak turns a normal run of losses into a deep hole.
A daily stop, like 2 losses and done for the day, caps how fast a streak can grow. See daily loss limit.
Questions
How do you calculate risk of ruin?
Formulas use win rate, the size of wins and losses, and risk per trade. Most traders get a practical feel from losing-streak math and simulations instead.
What risk per trade keeps risk of ruin low?
Many traders use 1% or less. Smaller risk means a long streak takes much longer to do real damage. It lowers the risk; it doesn't remove it.
Can risk of ruin be zero?
No. Any method that can lose can, in theory, lose many times in a row. You can only make it small.
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